How To Finance Your Startup Business

If you’re planning a new business and need some expert help to be ready for launch, this article looks at some of the fundamental things you need to do in terms of capital raising and the finances of funding.

When starting out, it is important to remember that you have options for financing your new business. The finance option you choose needs to work for you and your business model. There are pros and cons to each option – so talk to your accountant, financial advisor, bank or business mentor before you decide.

What are the options available to finance a new business? There are three main ways to finance your new business:

  1. Bootstrapping – using your own money
  2. Loans – borrowing from a bank
  3. Equity capital – getting investors on board in return for shares of your business. This also includes crowdfunding.

Debt vs Equity

If you’re taking out a loan, it means that you will be in debt until you pay the loan back. Loans and overdraft facilities can be straight-forward way to finance your business if you are just starting out. Your bank will need you to prove that you can afford your repayments, so take a moment to consider your financial history and how much you really can afford to borrow.

Some businesses choose to fund their business through crowdfunding and investors. Money is raised by the business, and in return, the business offers shares to investors. If you’re happy with not having 100% ownership of your company, equity financing may be for you. If you’re interested in crowdfunding, you do not necessarily have to give shares – you can offer incentives to those who participate in your crowdfunding, such as vouchers for your business.

How to apply for business loans

Before you apply for a business loan, make sure you have no significant outstanding debt payments and work out if you can really afford all the costs of the loan that you are wanting to take out, including interest and fees. Speak with your financial advisor if you are uncertain.

Before you sign off on a business loan, shop around. Look at the different loan types available and what each bank offers. Often different banks offer different interest charges. If you can, go with the bank that you currently have a relationship with. They are more likely to offer you a better deal if they know and trust you.

To apply for your loan, you will need to call your bank and make an appointment to speak with your bank manager or loan officer. Be prepared, and bring along your financial records, business plan and your cashflow forecast.

Alternatives to bank loans

Seed funding

Seed funding often occurs at the start-up phase of your business. These rounds of funding are often smaller than those from angel investors.

Angel investors

Angel investors are successful entrepreneurs who invest in new businesses that they believe will succeed. They don’t always take part ownership of the business – they could simply provide you with a loan, or take a percentage of your profits. They often will invest in a business that is in their area of expertise, and act as a business advisor or mentor.

Venture capital

A venture capitalist manages funds of investors who are looking for significant returns in the short to medium term. They often operate as a firm, and provide you with business advice – they like to have some control of your business to ensure that their investments are protected for their clients.

TIP: Perhaps consider venture capital as a next step of financial support for your business or for when you are looking to expand – you are more likely to get backing from venture capitalists if your business has had a good financial track record.

Building your books: What you’ll need before seeking additional finance

No matter the stage of your startup, or what type of funding you’re looking for, having your books in order will help articulate your value to potential investors or financial institutions.

Here are the key elements of bookkeeping that you should have in hand before raising additional capital.

Budgeting and forecasting

A budget helps you project the financial position of your business. You can use your budget to keep you on track or to monitor how you are progressing financially. You can also use budgets to plan for bigger financial goals. For example, if you wanted to upgrade to a new office in a year, you can create a budget to work out how much money you will need, where the money will come from, and if the goal is feasible.

It is most common for business owners to prepare budgets for profit & loss accounts, including income, expenses, and cost of sales accounts, and balance sheet accounts. To decide what accounts to budget for, first consider what changes you anticipate in your business. As a start-up, these changes could include taking out a loan or hiring an employee.

How you monitor your budget is down to you. You can enter it in a spreadsheet, or use software such as MYOB Essentials. Try to create your budget for the current financial year and the next financial year.

Profit & loss statement

A profit & loss statement is a financial report that tracks income and expenses – not cash coming in and out. Income is what you earn over the period, but it’s not necessarily what you’ve been paid for. As for expenses, you may have acquired them, but not paid for them yet. You should produce a profit & loss statement at least once a year for your annual tax return, along with a balance sheet.

You can access profit & loss reports in MYOB Essentials to produce a quarterly or monthly profit & loss statement to help you spot trends and address them earlier.

What a profit & loss statement tells you:

·         Gross profit margin – whether average mark-up is sufficient to cover all expenses and result in a profit

·         Expenses to sales ratio – if your expenses are becoming bigger than your business growth

·         Wages – if your wages are increasing more than your sales. If this occurs you may have to increase your prices or cut down your wage bill.

Balance sheet

Your balance sheet should aim to show your businesses financial position at a certain moment of time. It is very important for monitoring your business financials, and it is also beneficial to show investors, so they can get a good idea of your business.

Your balance sheet should include:

·         Your current assets

·         Fixed assets

·         Intangible assets

·         Current liabilities

·         Long-term liabilities

·         Owner’s equity.

IMPORTANT

Your balance sheet should always balance: assets = liabilities + equity. If you have checked your amount that is unbalanced and still can’t match it up, contact your financial advisor.

There are also plenty of software programs that can do your balance sheet for you – such as MYOB Essentials – where you can examine your balance sheet for the month, and even compare your months balance sheet with the same month of the previous financial year.

Cashflow forecasting

A cashflow forecast is a projection of the payments that will likely occur in your business. Your forecast will include your income and expenses, and when they are expected to be paid.

To be as accurate as possible, your forecast needs to include balance sheet liability payments, account for private transactions and capital, and accurately reflect the projected payments and receipts from your bank accounts.

REMEMBER

Cashflow forecasting is just an estimate of your finances, and the number you forecast may not be a mirror image to what you actually receive.

3 funding a business fundamentals:

  1. Starting up and running a business costs money. You need to consider where this money will come from.

  2. Potential sources of business funding include personal savings, loans, VC or Angel Investor funding, incubators and accelerators, and crowdfunding.

  3. When deciding which funding option is right for you, consider the non-financial investment possibilities that come with each option. The benefits of good mentorship and a connected network are often worth their weight in gold.


This article is produced by the MYOB team – massive thank-you to MYOB for their continuous support for the Ōtautahi startup and innovation community.

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