By Matt Bacak |
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Starting a business requires funding in the form of start-up
capital and initial operating costs. Although personal savings
and loans may be adequate to start a small business along with a
great idea, some businesses require a lot more capital that can
be borne by savings alone. Of course, with greater capital
required comes a higher risk level as more sales and revenue
would need to be generated by the business in order to support
the repayment amount as well as to produce a healthy return on
investment percentage.
The second option to obtaining
capital would be from people that you know, such as friends,
family and relatives. Equity financing could be obtained from
there sources, or just as a low-cost loan payable over a certain
period of time. This will be a great benefit to you as you won't
have to adhere to conditions and the higher interest rates
imposed by financing intuitions or other stakeholders.
The most common source of financing would be from lenders such
as banks and credit unions. These organizations are in the
business of providing financing and will impose a particular
interest rate on your loan. Apart from that, they may impose
restrictions on conditions on repayments and even on limitations
on the usage of funds provided to you. This type of loans are
normally known as debt financing, as obtaining capital from
these sources increases the debt of your company.
Equity
financing can be obtained by other shareholders or venture
capitalists. Capital obtained from venture capitalists are
regarded as an investment into the company and not as a loan. As
venture capitalists are very selective in the projects that they
fund, as they want to ensure that their investments pay off
multiple-fold. Therefore, venture capitalist funded projects are
subjected to scrutiny from venture capitalists in terms of
management, decision making and accounting procedures.
The U.S. government has realized that the importance of funding
to fuel the growth of small businesses and thus have launched
the Small Business Administration organization for this purpose.
There are various loans offered based on the nature of the
business, the amount of financing required as well as the
repayment period. Apart from that, certain types of loans are
funded by lending partners of the SBA, with the SBA acting as a
guarantor for the loan. This way, a longer loan repayment period
can be obtained, with a lower risk on the lender.
There
are also many other capital sources that can be obtained by a
small business. This would be a loan from a credit card,
employee stock ownership, home loan refinancing or even purchase
order financing. All of these are just glimpses of the various
ways in which money can be obtained to start a business, each of
them with varying cost levels. Therefore, it is up to the
business owner to decide on the type of financing source would
be most suited for the business.
Once you have determined
your financing source, you will then need to develop a business
plan that you will propose to your potential capital source.
This requires expertise in producing a viable and impressive
business plan, and therefore needs to be as comprehensive as
possible in provided business information, forecasts and
budgets.
The first section of the business plan would be
on the background of the company. Here, details of the name of
the business, the physical location, the amount required for the
startup and information on the business owners are provided.
Then, the next section will be a holistic explanation on the
nature of the business, its uniqueness, the long-term potential
as well as the sustainability of the business. A listing of key
success factors as well as the strength of the business idea
would be ideal to be used to support the business plan.
After that, a listing of the management team of the company,
their background and credentials as well as their stake in the
company is drafted. Information on the industry and market of
the business will follow, where the maturity and opportunities
available within the industry is highlighted. Finally, critical
financial information, incorporating forecasts and budgeting are
listed. This would be an area of utmost importance to anyone
evaluating your plan, and thus needs to be done with accuracy to
create a positive impression. |
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