It’s no secret that starting a business is a big investment. Between setting up your office, purchasing equipment, buying materials, ramping up marketing, legal fees and many other expenses, it takes a lot of cash just to open the doors.
Once you’re open for business, it can be challenging to have enough working capital to complete work when all of the money you had is already invested in the business. You need to cover the expenses of the job, such as labor and materials. If you don’t have the proper start-up funding in place, this can be nearly impossible.
When you decide to start a new company or open a new branch of your existing business, it’s important to plan ahead.
Start by having your funding and cash flow outlined in your business plan. Make logical estimates for things like start-up costs, labor costs, supplies and other miscellaneous expenses.
Next, you need to ask yourself: do you have sufficient cash to cover expenses even when your customers don’t pay you for 30 to 90 days?
It’s important to plan how you’re going to finance your start-up company. Don’t assume customers will pay you on time and that your expenses will be exactly what you’ve budgeted for. Give yourself some leeway.
When you consider your start-up funding options, you shouldn’t try to borrow the minimum amount. Unexpected costs and payment delays are bound to happen. Give yourself enough cushion so that you can continue operations, even when the unexpected happens.
There are several different ways you can fund your start-up. It’s important to do your research to see what the best option is for your business.
You want to ensure you have enough working capital to not only open the doors, but complete jobs and accept new contracts for future grow.
Some start-ups seek investors to contribute to the financing of their business. If this is your plan, be sure to have a solid business plan so it’s clear to potential investors what the plan and goals are for your business.
It’s important to remember that when you seek investors for funding, they’ll usually want a portion of your business, profit sharing or the cash paid back with interest. Be sure to seek legal counsel when the agreement is made to ensure you’re comfortable and clear on the terms.
Many start-ups, especially those that do contract work on net terms, run into cash-flow issues. When you’re waiting 30 to 90 days to get paid and you need to meet payroll, catch up on bills and invest in new resources, sufficient funding is scarce. Invoice factoring allows start-ups to get paid same-day on their invoices so that they’re able to fulfill their business obligations.
Lines of credit can give start-ups the cash they need. The bank gives you a capped limit and you pay monthly interest. Depending on your credit score, the amount the bank is willing to lend you may not be enough. Interest rates can vary based on your credit score and amount borrowed.
If your business starts to grow and you need more access to working capital, it can be challenging to do so with a line of credit, as debt is created on your balance sheet. If you choose to obtain a line of credit for your start-up funding solution, be sure this will not limit your ability to grow.
Many businesses think of a business loan as a traditional way to finance. While business loans can provide you with the cash you need, there are limitations to consider.
First, the amount is capped. For start-ups with no credit history or financial history, the amount borrowed up front may not be enough – if any at all. In the event that your business grows rapidly or you have some major unplanned expenses, it might be difficult to obtain more capital through a business loan, as debt is added to your business.
The application and approval process from a business loan can be lengthy. It can take a few months to get the cash you need. When you’re starting out and trying to get your business off the ground, it’s important to be able to obtain sufficient funding, and quickly.
If you have sufficient cash left over after you open the doors of your business, consider yourself one of the lucky few. Self-funding can be a great option but is not a possibility for most.
Again, it’s important to do your research and weigh out the pros and cons of each start-up funding option. Depending on your business type, goals and customer payment trends, one start-up funding option may work out best for you.
While some factoring companies prefer not to work with start-ups, Scale Funding specializes in providing start-up funding. Since 1994, we’ve helped start-ups fund their dreams and turn their companies into well-established businesses. Give us a call at (800) 707-4845.