include coverage for drugs and dental expenses, some pay out a lump sum when you are diagnosed with a critical illness, and some provide ongoing payments for your lifetime. Discuss coverage with your financial adviser or insurance specialist to make sure you will be able to continue to meet your personal and business financial goals in the event of serious illness.
Sources of Financing
Once you have your business plan in place and you have reviewed and amended your personal financial situation, it’s time to look at the potential sources of financing for your business. Although a bookkeeping practice, like many service businesses, has lower start-up costs than a manufacturer or retailer, it is still likely that net profits won’t cover the funding of the start-up period. Therefore, you will have to look at either your own or outside resources (i.e., from lenders or investors) to cover start-up losses.
Internal Resources
The most available source of capital, at least in the start-up period, will probably be your personal savings and loans from family and friends. Until your business develops a track record of financial success, external capital providers, such as investors and banks, will be less likely to take a risk on your new enterprise. Luckily, there are many sources of internal capital. Your own resources could include the following:
• Savings
• Personal loan or line of credit
• Remortgage of your house
• Credit cards
• Borrowings from friends or family
Some of these sources are preferable to others. Be sure to weigh the risks of each type of borrowing. For example, remortgaging your home puts your personal residence at risk if you are unable to repay the loan. Credit card borrowing is usually an extremely expensive option and can damage your personal credit rating. Borrowing from family or friends can bring its own tensions if payments are deficient or late or if the lender wants the principal paid back sooner than you expected.
External Resources
Once your business has developed a track record of financial success, new avenues of capital become available. Outside sources of funds could include the following:
• Business bank loans
• Business lines of credit
• Business credit cards
• Private loans
• Leaseback agreements
• Business property mortgages
• Stock sales (in the case of corporations)
• Venture capitalists
• Joint venture partnerships
As with personal borrowing options, some types of business borrowing are preferable to others. Some of these sources of funding represent equity (i.e., the lenders own a stake in your company), while others represent debt to outside parties. The type of borrowing you choose may have an effect on the debt to equity ratio of your business, which may impact the ability of the business to borrow more funds.
In the start-up phase, personal borrowing may be all that you have access to. The more sophisticated forms of business financing, such as joint ventures and venture capital, may not be accessible for several years.
If you employ external financing, regardless of the type, there are some basic questions you will have to answer from a prospective lender or investor. The answers to these questions should be found in your business plan.
(a) Is the business built on a solid plan? How much homework have you done to prove that this is a viable business venture?
(b) Do you, as the business owner, have enough entrepreneurial and managerial skills to build and manage a business? Lenders will look for your training or ability in finance, bookkeeping, operational management, strategic planning, and human resource management. Simply having prior bookkeeping experience will not be enough.
(c) Is the business built on a model that will have sufficient cash flow to pay its creditors, including this particular lender? The lender will be concerned not only with their exposure to your business’s risk of failure, but the exposure of other lenders. For example, if there are other lenders who have priority repayment or repossession status, the lender who is assessing the extension of further credit may be worried that if you go under, there will be nothing left with which to repay their loan.
(d) Do you, as the business owner, have enough assets (both personally and in the business) to satisfy the outstanding amount of the loan if you default on the payments? The lender certainly would prefer to be repaid in the normal course of events, but will also want assurance that assets can be seized as a last resort to cover the outstanding amount of the debt.
Your Relationship with Your Banker
If you don’t have a long-standing relationship with your banker, you should establish one before you go to the bank with hat in hand asking for financing. Set an appointment and chat with the banker. Find out about the bank’s lending policies and criteria and their philosophy in dealing with small businesses such as yours. Make it clear to the banker that you will be dealing with many other small businesses (your clients) that may require the bank’s services in the future. A good banker not only is there for you when you need a loan, but can also provide solid business advice and become one of your peripheral external advisers.
It’s also important to meet with your banker on a regular basis, at least annually. Set up an annual meeting to go over your financials and review your lending needs. Your banker may have suggestions for rearranging your borrowing to save you money in interest and fees. Tell your banker what you’ve done over the past year and how the business has grown. Bankers like to see prophecies come true, and your banker will want to know you’ve made good use of the funds the bank has loaned to you.
Chapter Summary
• Before starting your business, it’s critical to project how much financing you’ll need to meet start-up costs and to provide liquidity before net profits emerge.
• As part of your start-up planning, you need to get a handle on your personal financial situation and make sure it is as strong as possible before launching your enterprise.
• There are many potential sources of financing available. Each has benefits and risks that must be weighed carefully.
• Your ongoing relationship with your banker is a key factor in your business’s success.
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