Financing is an essential phase for starting a new business or purchasing one that is already established. Although the business form determines the options for financing, the process is the same for all businesses. You determine the amount you need and find a source of funding.
Determining the Amount Needed
The first step in determining the amount needed for a new business is to make a checklist of all assets that are required. Assets include buildings, equipment, inventories and cash.
Financing the purchase of buildings may be done through banks or mortgage brokers. Regardless of your needs, you should shop for the best rates and payments. Your personal banker is a good place to begin because the bank has most of the information needed to qualify you for the loan.
Before purchasing the building, you should consider the possibility of renting your business space. Although you will pay taxes and maintenance in your monthly rent, you will not have the responsibility of paying for plumbing leaks and other expenses that occur.
Business and Other Equipment
The higher priced equipment can be financed through the bank or the equipment vender. Lower priced equipment can be finance using business credit cards that pay cash back.
Inventories are normally financed by the vendor.
Using Cash Flow to Finance the Business
The first step is to compute your monthly payments for a year. Include both liabilities and expenses. Your cash flow must cover this amount and give you the desired profit margin.
Next, list the cash flow projections for each month. By subtracting the payments from the income, you will see the amount of cash needed for each month. The cash shortfall may be financed through short term bank loans or credit card purchases.
Planning cash flow serves as a guide for the financial needs of the business. Planning cash flow makes it possible to purchase small assets without incurring interest charges, and you can reduce interest by paying debts early. Financing the business with cash that is generated by business operation is ideal.
Businesses may be financed through banks, mortgage companies, credit cards or personal investments. The best source and term for financing is determined by the individual need. Entrepreneurs should always maintain a source for both long term and short term borrowing.