Small businesses face some special financing problems. New small businesses without an established performance record will typically find it difficult to raise loans and get credit from suppliers. Hence, the most dependable source of small business finance is owners' funds, including what they can raise from friends and relatives.
Other pages under this section discuss several related issues. Click the link above to see brief outlines of these topics.
It is extremely important to ensure that you have estimated your small business financial requirements completely. Otherwise, you can soon find that you are unable to proceed with the business operations (and repay your friends and relatives). The emphasis in this article is on estimating financing needs, and looking at some financing possibilities.
You estimate your small business financing needs by firstly identifying the major requirements such as premises, equipment, working capital and initial operating losses. Next, you look at each of these and work out the detailed items involved, and their costs. Finally, you prepare a cash flow statement that estimates cash inflows and outflows month by month.
Businesses need finance for:
The above list represents the needs of a small manufacturing business. You have to identify the needs of your own business. Once the major categories are identified, gather all the detailed information and costs under each.
Initial Operating Losses: It is inevitable that you will have to finance some losses during the initial months. Sales have to reach a critical volume before they can generate sufficient gross profit margins to cover recurring expenses such as staff salaries, rent and interest payments. Take care not to underestimate these.
Profits versus Cash Flows: Even after you achieve viable sales volumes, you might have to wait for some more months before cash inflows exceed cash outflows. Customers will typically pay after one or two months from the sale date. Cash outflows will also include "capital" payments such as installment payments for equipment and loan repayments.
All the standard financing options listed below might not be available for a new small business. On the other hand, governments encourage small business lending, and you might be able to get a government guarantee that you can use instead of collateral security for getting a business loan.
We discuss some of these options, such as loans and grants, in more detail in separate articles. Grants are not typically easy to come by and so it is best to focus on the other options. However, if you are setting up a business in a backward region or in an area affected by disasters, you can explore the possibility of getting a grant.
Small business financing faces problems like unwillingness of lenders to lend to unknown small entities and of suppliers to extend credit. On the other hand, governments encourage small business lending by providing guarantees if your small business plan is considered viable. You can improve your chances by preparing detailed cash flow estimates.
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