Start-Ups: Smart Planning To Fund Your Startup (Forbes)

Start-Ups: Smart Planning To Fund Your Startup (Forbes) - Tree Growing On Coins

Start-Ups: Smart Planning To Fund Your Startup (Forbes)

Starting a new business can be overwhelming. Whether a company is trying to get off the ground or grow to the next level, a financial plan can help entrepreneurs focus their efforts and prepare for success, according to SCORE, a nonprofit dedicated to helping start-ups.

A solid financial plan can help owners avoid the causes of cash flow problems, anticipate financing needs, and keep borrowing under control, according to SCORE’s downloadable workbook, “How to Really Start Your Own Business.” What should businesses consider when making a financial plan?

Make it Personal
One of the first considerations for startups is determining which sources of funding are available. Personal financing options include self-financing through savings or credit and obtaining financing from friends and family. A financial advisor can help you sort through your options.

When approaching friends and family, “Go very slowly,” says business plan expert Tim Berry, founder of Bplans.com. When approaching friends and family, make sure those who are willing to invest in your business understand up-front how easily the money can be lost, he says.

For friends and family, a concise financial plan (3-6 pages) may work best, reports SCORE. It should cover the basics, including an executive summary, a description of your business, market, competition, and product, as well as your plans for marketing and management, financial data, and return for investors.

Just as instability in your personal finances would be discouraging and stressful, the same will naturally be true for your small business. In fact a recent study of young aspiring entrepreneurs in the UK showed they considered a lack of funding the number one barrier to starting a business. Establishing a plan early and with funding from sources you trust can give you the peace of mind and confidence you need to focus on your business goals.

Look Outside
To approach outside investors such as bankers and venture capitalists, a more formal written business plan is appropriate, says SCORE. Outside sources of funding include commercial bank loans, which are available for working capital and even expansion, but require collateral. The U.S. Small Business Administration (SBA) also guarantees loans for small businesses in some circumstances.

Venture capital is another possibility for companies that are aiming for multimillion-dollar sales, says SCORE. Venture capital firms typically look for repeat entrepreneurs and plans with huge growth rates in high-growth industries, adds Bplans’ Berry.

Angel investors include individual investors and investment groups. They also tend to require solid business plans, but may be more likely than venture capitalists to invest smaller amounts or accept less ownership.

Startups often require a combination of both short-term investment capital and long-term debt, reports SCORE. A basic rule of thumb is to use short-term financing for short-term needs and long term financing for long-term needs, the organization says.

Financing Options
There are two types of financing: Debt, which is borrowed and must be repaid over time, and equity, which is money raised by a company in exchange for a share of ownership in the business, according to the SBA. There are pros and cons to each: Debt financing usually involves paying interest, but also enables owners to retain full ownership. Equity financing, on the other hand, reduces ownership but can improve a company’s credit worthiness.

Banks and businesses usually deal with debt, while investors typically deal with equity, according to the SBA. When looking for funding, one thing to consider is your company’s debt-to-equity ratio between money you have borrowed and money you have invested, the SBA reports. The more money you have invested, the easier it is to get financing.

SCORE’s workbook offers more information in all of these areas, as do financial advisors and networks such as the SBA, local chapters of SCORE, and local chambers of commerce. There’s a lot to figure out when starting a small business, but making a financial plan and working with a financial advisor is always a good first step.

Category: Forbes, Lisa Wirthman, Northwestern Mutual, Start-up Fund, Startup