‘Drive like a Real Entrepreneur’ is the title of my new book, launched earlier this year. One of the first sections covered discusses the risk involved with setting up a business and financing methods for startups. There are two ways of financing a new business, internal or external.
Anyone supporting your venture will need to see a commitment from the originating entrepreneur. It is simply not good enough to explain that ‘you’ are putting in specific hours of work. Risking time and reputation is important but not measured nearly as important as hard cash which is difficult to earn and quickly spent/lost.
In my book, there are specific comments on the characteristics of being an entrepreneur, together with up-to-date, practical and useful management tools and techniques for aspiring entrepreneurs. Each week on this blog I discuss a relevant subject, sharing my own professional opinion with you, while answering telling questions. This is a sample of what you can find in: Drive like a Real Entrepreneur.
Five ways to finance your business are;
Your own funds; funding any venture yourself shows a true real commitment and demonstrates a belief in the venture’s eventual success. Obviously the amount of funds that you commit are down to you and should be committed on the basis of affordability. While £10,000 may be a considerable amount for some people, £100,000 may not be. Therefore it is not the amount but the percentage of your total cash assets that is important and the issue which should be considered. Perhaps a rule of not going above 20% for a risky venture or say 40% for something less risky but never above 75%. Also, never let on to anyone else the % amount that you are committing.
Friends and family; The next source or round of funding if it is above what you can afford, if you are putting in more than that 75% of your total funds would be from friends and family and don’t forget you may never be able to pay them back until sale. Of course the money could be lost if you fail. The funds may be better as small parcels of cash from a larger number. This could be seen to be difficult to manage but less onerous on you and you may be able to pay off a few of the originating funders as cash flow allows. If the business takes a turn for the worse, be upfront and advise the funders. Do not keep secrets. These funders may need a coupon or interest payment in the early years. Build that in to your cash flows.
Customer; there is no finer way to fund a new enterprise either through an upfront payment or an ongoing contract from a customer who needs your products or services and who supports your new venture. Ensure the customer is kept abreast of the success of the venture. Rather than giving a shareholding which should be as a last resort, perhaps provide the customer with preferable terms. The customer can also be a great reference site for you. This route works on many levels. Bank overdraft; perhaps the first level of outside commercial borrowing. It is flexible and on the right terms least expensive route. Banks will not lend much this way in terms of amount but may possibly match your own funding so could be seen as a resource to double your money.
Commercial loan; at this level we are talking about business plans and larger amounts. Generally they will be secured by a guarantee or on another asset you the entrepreneur may own such as your house. This need serious consideration and take professional advice on the terms offered.
Overall please consider that; • Shareholdings are structural and should be set at the beginning of a venture • External finance needs a payment of interest and potential repayment • Your own funds are known as equity and do not need interest • Keep the gearing between equity and lending low • Never over promise on the repayment of loans too early • Do not always think that the potential sale of the business will bail you out
Keep your own money and some potential sources of funds in reserve. Cash flow for a business is not linear, various needs and cash requirements can come at the most inconvenient of times. I hope this blog is most helpful, as this book is meant to be a must for those studying business. Give it a go for you and the team in your class.
If you have any questions, please let me know - I look forward to hearing from you.