Starting a business has many risks involved. From securing your initial funding to ensuring your finances stay afloat, there are many monetary aspects to juggle. While 30% of new businesses fail within the first two years of starting up, there are certain things you can do to ensure yours won’t be one of them. Here are some key financial things to consider before starting a business.
1. Risk & Return
Risk & return is a phrase most used by lenders rather than businesses. However, it pays to understand your company’s risk and return in order to find the best kind of finance and start your business plan on the right foot.
The risk attached to an investment is a way of describing how likely it is to lose money. Buying shares in a new company may be considered very high risk: there is a possibility that the firm’s products or services may not succeed, which could lead to losses for shareholders. However, the potential returns for low-risk investments can be lower than for high-risk investment. It’s up to lenders to decide whether they take that risk in order to gain a potentially great return on investment.
Similarly, you will need to figure out your own attitude to risk and return when deciding how much funding to apply for in the beginning. Risk is often boiled down to your current financial situation. The hardest part of starting a business is usually raising the money to get going. The entrepreneur might have a great idea and clear plan of how to turn it into a successful business. However, if sufficient finance can’t be raised, it is unlikely that the business will get off the ground.
Thus, when you are making business investment decisions, you need to establish your attitude to risk. Often, by taking on more risk can you give your money the opportunity to grow over the long term and really make a success of your company now and into the future.
2. Cash flow management
A startup business may spend more than it earns for two or three years. The amount of financing you need may continue to increase long after you reach breakeven.
Establishing a budget should be a priority and it’s important to ensure you stick to it. As long as you factor in all possible expenses in your startup business plan, you should have enough finance to cover the costs until you start making a profit.
If you’re thinking of starting up a seasonal business, you will also have to account for the predictability of cash flow peaks and troughs. It might be an idea to show your forecasts for sales and expenditure, and what your cash position will be each month – including capital costs, such as purchasing equipment.
One way to ensure you stay on top of your cash flow management is by tracking and monitoring all your spending. Include everything from small stationery orders to equipment hire – it all adds up. If you’re in a position where you can afford to hire a professional to do this for you, then do. This will be a huge help when it comes to managing your taxes at the end of the year.
3. Fixed expenses
Fixed expenses are outgoing expenses which cannot be avoided and won’t change based on the success of your business. These include premises costs, insurance, staffing and other professional costs, as well as stock, marketing and finance expenses (such as interest).
Paying your fixed expenses is obviously very important as it will ensure the success and longevity of your business. However, there are ways in which you can limit spending to help you succeed in those first few years.
While a fancy office or premises may seem like a priority, focusing on substance over style is extremely important when it comes to startups. After all, the fancy office will become empty if your business fails within the first year. Reducing your spending on these things in the beginning means you can focus on growth and generating revenue.
4. Preparing for every outcome
Optimism is half the battle when it comes to setting up your new company, but you never know what’s around the corner and there are bound to be roadblocks along the way. Preparing yourself for small failures by having savings or extra financial security means your business won’t fail entirely. It also means you won’t be left with lots of debt, as you’ll be more likely to recover from the difficulty than go into liquidation.
Unsurprisingly, it’s much easier to obtain business funding when you’re in a good financial position. Most important of all, don’t wait until your need for extra funds becomes urgent. At this point, you’ll have left yourself with limited options and may make hasty decisions out of apprehension. Ensuring you have enough money aside for these eventualities will give you peace of mind but also act as a buffer and potentially save your business financially.
5. Which type of finance is right for you?
There are many business finance solutions and startup loans – the problem is often choosing the one which is most suitable for you and your business needs. The alternative funding approach is proving particularly popular with startups. Businesses under five years old are as likely to select alternative finance methods to secure capital as approaching banks. This is key for direct investment in businesses, including stock purchase, expansion & refurbishment funds and equipment purchases. Not only that, but alternative funding is potentially accessible at a faster rate than your traditional loans.
Some of the best types of alternative funding to consider for startup businesses are:
No Trading History
- Secured business loans – this type of loan uses assets such as property, equipment or vehicles to secure the loan against. If you have not yet built up a trading history, lenders may feel more comfortable offering this type of loan which ensures they can make their money back in the unlikely outcome of missed repayments.
- Asset Finance Lending – like secured loans, asset finance uses business assets to secure a loan. These can be things like outstanding invoices as well as equipment, property and vehicles.
- Start Up Loans – specifically designed to help new businesses, startup loans is a government-backed scheme which helps individuals start or grow their business in the UK. Visit the Start Up Loans website for more information.
4 months trading history
All the loans stated above would still be suitable, but you could also consider the following options if you have a few months’ trading history behind you.
- Unsecured business loans – these types of loans don’t require assets to secure a loan against, but they will usually request a guarantor. Decisions are usually made within 48 hours and the applications are simple, making the process really easy.
- PDQ cash advance – a PDQ or business cash advance secures lending against your business’s card terminal. Seasonal businesses can benefit greatly from this type of funding as the repayments will alter based on the amount of turnover.
- Invoice finance – having capital tied up in unpaid invoices can be particularly hard for new businesses. Invoice finance enables you to unlock these funds and continue trading without stress.
Often in the small/medium business world, the alternative funding option is a viable route that potentially carries success. Aurora Capital eradicate the risk and maximise the potential for success by assisting UK businesses raise the capital they require as well as a suitable product for their organisation.
If you would like to get in touch and find out more information on alternative funding, please call the team on 01371 870 815 or email [email protected].
