Getting Your Finance Right

If you don’t plan and budget, how will you know what sort of funding your business needs, how much and when? Dennis Mattiske looks at ways of integrating planning, reporting, analysis and adjustment to smooth the way from start-up to expanding your business.

As all of our young guns can tell you, starting up a business is a very exciting time but requires a great deal of work, planning, and preparation to increase the chances of success.

One of the most important areas to get right is financing. Good financial planning can be the key to whether a business makes it through the start-up phase, or fails to find its feet.

Unfortunately, people often underestimate the costs involved and can be over-optimistic about the time needed to get the business to a profitable level of trading. It’s essential to identify right from the start all the costs that are likely to be incurred, both as one-off start-up costs and then ongoing costs as the business develops and grows.

These costs may seem innumerable. They include rental bonds, fit-outs, purchase of equipment, computers and software, website development, employee hiring, stationery, logo and packaging design, and setting up marketing channels. On top of this is the investment in working capital, such as the stock and level of debtors (net of creditors) required to run the business, as well as the initial losses that may be incurred in getting the business to a break-even level of trading. Sometimes this will be amplified by the need to offer discounts to buy market share.

As well as identifying these specific costs, the appropriate type of finance should also be considered from the very beginning. As a rule of thumb, longer-term expenses are best matched with longer-term debt. So, for example, costs relating to premises fit-out, the purchase of machinery and equipment, and the expected hardcore on-going working capital could be financed by leasing. While it is usually a little more expensive than bank loans, it is often the most practical finance for this type of expense.

For the remainder of the set-up costs and hardcore working capital, a bank term loan for a minimum of five years is cheaper than financing all by bank overdraft. An overdraft should only be used to cover the fluctuating working capital that is always required to cover the differences in timing of payments and collections—it should not be used to fund long-term expenses.

Debtor financing, which is currently in favour with some lenders, is not so easy to procure in a start-up business unless it has very good systems and the customer debt is really ‘blue chip’. It involves selling business debts, at a discount, to a financier who then has responsibility for collection. It can help cash flow considerably, reduce risks and overcome slow payment by customers.

A good bank manager should be able to match the right funding to requirements if given the right information. Whatever the method of funding, personal guarantees and freehold property security will be necessary for the funding. The lender will also want information on the business’ capacity to pay both the interest and any loan repayments. Wherever possible, business owners should avoid using personal assets to secure business loans.