Successful entrepreneurs are continuously looking for ways to drive their businesses forward. To enable them to do this, they must have adequate finance. This will help them fulfil the overall objective of their business(es). For the benefit of this blog, I will discussing three types of finance... Long term Long term finance will be to finance assets that you will hold for a long period, say over 5 years. I have put this first as it will be items such as property or assets that hold their value. Just take a moment to consider your mortgage for your house. The same concept applies in business. This is the least expensive type of finance, as well, and will almost certainly be secured on the relevant asset.
Medium term Medium term finance would be for items such as equipment and vehicles. If you were to purchase these and the life of the relevant asset may be 3 years, the suggestion would be to seek finance to cover that period. Pay for it, as you use it. The asset would earn for you as you spend.
Short term This generally relates to working capital. Financing debtors and stock is incredibly important when a business starts and is looking to get off the ground. Work has to be put in to the generation of a sales invoice before it is paid, this may take the form of labour and materials and the business has to commit to pay for that before the business, itself is paid.
In my book, I refer to the different types of investor, but think about and consider the effect to your idea or business of;
• A customer paying upfront for work • A business ‘angel’ who is willing to loan you funds to commence your business • Borrowing some money from friends and family
This would generally be considered to be the ‘first round’ of funding. As your business moves forward and starts to progress, gaining customers and obtaining trust and a market share, then consider;
• Obtaining a bank overdraft • Borrowing against your house to put funds in to the business • Looking for a business investor, such as an ‘angel’ above who may invest rather than loan funds
After a few years and once you are successful you could well find that funders come to you. They will see from your accounts lodged with the authorities that you are a substantial and worthwhile business. Banks may court you and finance houses will offer attractive packages on equipment.
Be wary and apply the same principles as you did when starting out. Do not overspend and take the finance according to the rules laid out above for long, medium and short term finance.
Next week I will be discussing some of the Habits of a Super Entrepreneur. In the meantime if you have any questions or wish to share your opinion on this post then please do get in touch.