Step 4: How will you finance the business?

Every day thousands of small businesses are forced to close their doors. The most common reason given for the high failure rate is lack of adequate capital. Capital is any asset a business uses to create value and generate profits, including financial resources (money), equipment, and even human capital (employees). Working capital means cash and is usually what beginning businesses lack.

Here are facts you should know about financing your business:

  • Most businesses are started with money from personal savings, family, or friends.
  • Only about 20% of new business owners start their business with money borrowed from commercial lenders.
  • You will need a well written business plan and a good personal credit rating to be considered for a business loan, particularly for a start-up.
  • No conventional lending source, private or governmental, will make a commercial loan for 100% of the funds you need to start your business.
  • As a general rule, you will need to provide a minimum of 25-30% of total start-up costs through personal investment. If you have less than that, your chances of obtaining outside financing are not good.
  • Your "sweat equity" will not be considered relevant by a lender.
  • As a general rule, you will need €1.50 in quality collateral (machinery, equipment, real estate, etc.) for every €1 you want to borrow.
  • Although you may think your collateral's true worth is its appraised value or its original cost, its worth to the lender will be far less than either of these values.
  • Your financial projections must show that any loan proceeds, plus interest and other business expenses, can be repaid from business revenues. The assumptions you base your financial projections on will be examined carefully for reasonability. When the lending decision is being made, having adequate collateral will not override the business's inability to generate positive cash flow. 

Read More: Business Start-up Guide