Small Business Funding
You know that you have to find the money to purchase the initial equipment and stock of materials. Do you also know that significant funds might be needed to carry you through till your cash inflows match your outflows? Small business funding involves financing small business starts and also subsequent net cash outflows for a few months (or even years).
While computing funding requirements, it is cash flows that are considered, not income and expense. Extending credit (and receiving credit) could mean that the actual cash inflow or outflow occurs a month or so after the actual incurrence. Cash flows also include items that are not income or expense, such as equipment purchases, loan receipts and repayments. Cash flow computation is thus quite different from profitability computations. Even with good profits, you might have a negative cash flow.
Estimating Funding Requirements
You estimate your small business funding requirements by preparing a cash flow statement. This statement would consider the impact of credit on the timing of receipts and payments as well as include capital receipts and payments such as loans and equipment purchases. This statement is prepared to show receipts and payments for each month or quarter.
You start with the opening surplus or deficit at the beginning of each month or quarter and compute the closing surplus or deficit after estimating the receipts and payments for that month or quarter. It is the deficits that you have to fund. Any surpluses could be used to make repayments.
It is needless to say that you should make a serious effort to identify all likely items of cash receipts and payments. Actually, a detailed business planning exercise should come first. You should also include a reserve for unforeseen contingencies to offset the common tendency of estimating both the amounts and timings optimistically.
Small Business Funding Sources
Your savings is the first source of your small business funding. Using your own money tells prospective lenders that you believe in yourself and your business. It also provides the margin that lenders seek while extending loans.
In an ideal scenario, you might be able to start your small business with 5000 dollars or less and then generate sufficient profits and cash to fund your small business growth. You won’t have to face any rejections for your loan requests because you do not apply for any. Or your small business funding requests are approved instantly because you have built up a successful record of business operations.
Except for a very small business that happens to fulfil a pressing need in a community, such a dream scenario is not likely to occur. Your savings might be inadequate, and you might have to approach friends and relatives to supplement them. Lenders might be reluctant to provide funding to a new startup with no past record of success. And you might not have substantial personal assets to offer as collateral security.
It is in this context that government support becomes important. Most governments recognize the jobs-generating potential of small businesses (far more employment is generated per dollar of investment in small businesses compared to large businesses). Government funding for small businesses usually takes the form of guaranteeing that the loan would be repaid, thus making lenders more willing to take the risk.
You might also find that you could receive some government grants under schemes of economic development – of particular regions or communities. However, you should be aware that grants are usually given to organizations that support small business entrepreneurs and not to individual entrepreneurs.
Another source of small business funding is risk capital extended by venture capitalists and angel investors. Angel investors are wealthy individuals, and venture capitalists are cash-rich organizations. Both seek returns that promise to be higher than what they could get by investing in non-business alternatives. If your business proposal appeals to them, they might invest in your venture in the form of equity capital (shares).
However, such risk capital would generally be available only if your small business project is an innovative one with high profit and quick growth potential.
Yet another source of small business funding is trade credit. Suppliers might allow you a month or so to pay their bills. However, this could be offset by the credit you yourself have to extend to your customers.
Other sources of small business funding include discounting your credit invoices, leasing or hiring instead of buying, and credit cards for very small businesses.
Unless you are going to meet your small business funding requirements entirely with your own savings, you would need to prepare a business plan that enthuses prospective funders. Even if you fund the project yourself, you will find a business plan a top-value resource for achieving business success. Let us briefly look at business planning in the next section.
Plan To Succeed
A well-known saying goes thus: FAILING TO PLAN IS PLANNING TO FAIL.
Translate your business idea into a clear business model, explaining how much income you will earn, how you will go about it, what expenditure will be incurred in doing so and whether there would be an adequate surplus after meeting all the expenditures.
The article on business planning discusses how you could translate your expectations and their implications into a realistic business plan. Such a well-researched plan is necessary not only to help you get loans for your small business funding but also to help you monitor your performance against the plan benchmarks.
The Loan Proposal
Lenders look for evidence about the completeness of the business plan, its authenticity, the borrower’s character, opportunities in the market and clear competitive strategy. Provide these in the loan request you submit to them.
Your small business funding efforts would be helped further if the proposal document is attractively got up, neatly laid out and printed, bound for easy reading, and the topics arranged in an easy-to-follow, natural order.
Your loan proposal should contain the following sections, generally in that order:
- An introduction to the people behind the venture, yourself and other members of the management team;
- A statement of the loan request, how much money is needed, what for and how it is proposed to be repaid;
- The business plan – Narrative descriptions of product or service, prospective customers, the volume of demand in your area, existing competition in that area, how you will face the competition, basis for the sales estimates including volumes and prices, the basis for computing costs of production and operation, profit estimates; the facilities needed by the project, assumptions made for working capital computations; an overview of cash flow patterns and suggested loan repayment schedule;
- Attach financial statements and projections and net worth statements of owners as appendices.
If you have a good credit record, mention it in the proposal. Lenders would invariably do a credit investigation, and you can give this process a favourable start.
Small Business Funding – Making Your Move
Your small business funding exercise really gets underway when you present your loan request to prospective lenders. Who are these lenders? Banks, Credit Unions, Leasing Companies, Factors, Venture Capitalists and Business Angels are the main funding providers. The country-specific small business start pages discuss how to find these small business funding agencies.