Best ways to fund a new business

Being a business owner is a dream of millions of people around the globe. The good news is that if a budding entrepreneur has a solid business idea and does his or her homework to produce a viable business plan, it is certainly not impossible to become the owner of a successful enterprise. Before the dream can become reality there are a few important steps to consider.

Target market

This is probably the most important step. If there is no market for the product or service, there cannot be any business. Who will buy the product/service: men, women, children, families, business people?

Competitors

Even if there is a market out there, it is important to know how many existing competitors there are and what their strengths and weaknesses are.

Business structure

In this regard the owner has to decide whether the business will be operated as a sole proprietor, partnership or a limited liability company. These options imply different tax structures and it is important to do thorough research in this regard.

Legal requirements

The business will have to be registered with the authorities. How this has to be done depends to a large degree on the business structure discussed above.

Business name

When naming a business it is important to choose a unique name that captures the imagination of the reader. ‘Super-fast Deliveries’ tells more about the business than does ‘Smith & Wife’.

Financing

Many small businesses eventually fail because of insufficient capital to cover the business costs during the first year of operation. Make provision for more than just the furniture, computers and machinery; when the business starts to grow the cash flow needs will increase dramatically.

Funding the business
In this regard there are several options, each with its own benefits and disadvantages.

Savings

If you have sufficient funds this is probably the best way to start a small business. Using your own capital to start a business illustrates a real intention to succeed.

Friends and family

Convincing friends and family to invest in a business idea might be easier than trying to convince a bank manager, but be careful: this could ruin a perfectly good friendship if things go seriously wrong and investors lose their money.

Credit cards or bank loans?

When seeking a bank loan a well-prepared business plan is vital. The applicant will most likely need assets to guarantee the loan. Using existing credit card facilities is an option, but only for relatively small amounts and for short periods of time.

Business angels and venture capitalists

A business angel might be someone like an ex-boss who will be prepared to invest in the business, but normally he/she would require a share of the business in return. A venture capitalist will usually only be interested if the business is already making profits.

Asset based financing

The bank might be prepared to issue a second mortgage on an existing home. Log book loans against a vehicle is also a possibility, as long as the vehicle has been fully paid for. If the business is already up and running and has generated invoices, invoice factoring is also worth exploring to maintain cash flow.