Many people find that they come unstuck when it comes to business finance. It can be a source of unnecessary worry.
I’m going to cover the best source of finance, and also explain why that is. I’ll cover some of the other sources and discuss their pitfalls too.
By the end, you will have an understanding of how people can be caught out when it comes to sources of finance.
Now there is one source of finance that I recommend above all others. And it’s one that you can plan for even before you start:
There is an old saying that cash is king. Indeed, having saved funds to start your business makes things so much easier. If you are going to start part-time then you may decide to delay the start date so that you can build up savings to cover the expected start-up costs.
Quite a few businesses fail in the early years though a lack of cash, so if you structure your business from the start to have sufficient reserves then you’ll be protected from the problem. I’m going to cover a cash forecast plan in the business planning session later, as this is a key document.
I also talked about how a lack of funds can reduce your sales effectiveness, as you will then be worrying about funds and be somewhat desperate to make the sale – which will come across in your presentation unfortunately. However, having sufficient money in the bank will avoid this problem.
When you set up a business you may want a business bank account (although not strictly required for a UK self-employed person, it is recommended as it will make your bookkeeping easier.)
When you open the bank account you’ll probably be asked about overdrafts and loans; the two areas I’m going to cover next.
If you are planning to build up a cash buffer before starting then you won’t require either of these, it also means that you will be immune to any future credit crunches – as you won’t require credit.
The traditional source of finance for a business is an overdraft, but there is a key point that is not understood about them.
An overdraft is usually arranged for a year, and renewed annually (for a fee.) However, what many people often miss is the clause that they are repayable within 30 days on demand. There have been seasonal businesses who wrongly structured themselves around their overdraft facility, planning to use it in the quiet months of the year before replenishing it when funds are received.
Unfortunately, this is very bad planning on the part of the business owner, the bank can quite rightly call in the overdraft with a month’s notice under the terms they agreed to. As a result of this, the business could fail, people might think the bank had put them out of business but that is not actually the case.
The other main source of finance are loans. With loans there are a couple of points to be aware of:
1) There are again set up fees to consider, as for overdrafts, and these can be a considerable percentage depending on the loan amount.
2) The interest rate on the loan is usually higher for a smaller loan, so you could find that this ends up proving costly. Remember the advertised interest rate is not always given to every applicant.
In this session we have covered how to arrange your finances in order to reduce the risks on the business, and also to increase your chances of success.
In the next session I will cover how poor financing decisions can be a contributing factor in the unfortunate early demise of a business – as well as telling you how to avoid the problem.