Starting a business is both exciting and nerve-wracking. Depending on the type of business you’re starting, you could be risking a portion or all of your savings, other people’s money, taking on loans or all three.
Before you choose any of these financing options, do your research. To get off on the right foot, consider these best practices:
Create a detailed business plan with realistic financial projections emphasizing how the funds will be used. If you can show a clear path to profitability by outlining your goals, targeted market, and potential challenges to accomplish the projections, lenders will most likely buy into your concept and plan. Being able to clearly articulate how the funds will be used is often missed by mission-driven small-business entrepreneurs. Another reason for a plan is to showcase your expertise to give lenders confidence you have the ability to exercise the words in the plan.
Lenders look for creditworthiness to evaluate the risk of repayment and collateral that can provide a measure of financial security for the loan.
Before jumping at an early offer, research all the funding options including traditional loans, Small Business Administration-backed loans and other community based sources that might meet your business’s needs.
One also should build relationships within the industry and community by networking that might lead to potential investors.
Build an Emergency Fund
What works for personal finance also applies to business finances. An emergency fund can help you deal with sudden and unexpected costs, changes in the business climate, the sudden loss of a key client or other shocks to your business. Having money set aside can help you weather the storm until conditions change.
Keep Your Business and Personal Finances Separate
From an accounting and tax standpoint, it’s important that you keep your business finances separate from your personal finances. Not only will this make it easier come tax time, but this separation will also give you a truer picture of your cash flow and profitability so you can make quick adjustments when necessary.
Cash Flow is King
When you’re cash-strapped, it’s nearly impossible to take advantage of new opportunities. And if you run out of cash altogether, that’s the end of your business. To keep your cash flow in positive territory, keep expenses low, take on debt wisely and focus on growing both new customers and revenue.
Be Realistic About Costs and Goals
Starting a business is exciting. That excitement can sometimes lead you to underestimate what it will cost to get things done and overestimate what you project to earn. Optimism is great — and it’s OK to believe in yourself, your abilities, and your business. But be sure your projections are grounded in reality, so you’re not blindsided by an over-extended budget or projected revenue shortfalls.