A business requires finance to survive. All new businesses start up differently, some find that they need help from outside such as bank loans, others start up without borrowing a penny. If a business does decide they want to borrow money they should know how much they need, what it will be used for and how they will repay it.
Cash flow forecast is what the business predicts to spend and it's not likely that it will be an exact reflection of the way the businesses financial year works out to be. It will however serve as a plan to work for the future. Breaking down the first year into a monthly financial period will help the business work out their income and outgoings will compare in each period. This lets the business know when their borrowing requirement will be at its best. The business needs to be confident that it will generate enough money to repay the lender. The forecast will also help with this.
It is a tough economic climate at the minute with the credit crunch. So lenders are more reluctant to lend new businesses money. In order to get them to give businesses money they need to be sure that they will get their money back. So if a business is not clear about how much they want to borrow, how you it's going to be paid back and if there is no security on the offer they will not hand out any money. This is why it is vital that the business has an idea of they need. A good way to do this is to have a business plan.
When we first start up our business we need to know how much start up capital is needed. Start up capital is the money that my partner and I invest into the business to start it off. A loan can be taken up to pay off the start off capital or me and my partner can pay, or if the owner can only afford a certain amount then the bank will contribute and pay the rest of the money needed. The legal form of the business will determine how much capital can be invested.
A public limited company can raise capital from a stock market issue of share, when it 'floats' as a new company, the public can buy shares. A limited company can also raise capital through a specialist 'Venture Company' which can purchase shares, but conditions are attached. /limited companies can also raise capital from Business Angels. This is a picturesque term used for wealthy individual who invest in the start-up and growth of businesses in return for a share and sometimes an active part in the company.
Business Angels will often have already made a fortune through other business ventures and will possible run a business of their own. A loan may also be taken out for the start up costs of the business and the bank will match whatever the sole trader has put into the business.
When decided which source of finance I am going to use for my business I will need to take into consideration that there are many different things I can choose from. So to choose the right Loan for my business I need to do a lot of research into what each source does.
Term loans are the most common general purpose loan. They are used for working capital, expansion, refinancing, and acquisitions. You can repay them monthly over a term based on the expected lifespan of the assets you're purchasing. This straightforward loan is most common for larger amounts.
Short term loans are almost always set up for terms of one year or less, and are repaid in a lump sum at the end of the term, instead of monthly. They're usually for smaller amounts – less than 100,000 – and are best for seasonal inventory build up or small investments with quick returns.
Equipment financing is generally easier to obtain than general lines of credit, simply because the equipment you buy serves as direct collateral for the loan. It is also less risky, in that if you are unable to make your payments, you don't have a lien against your entire business or your personal real estate: all you lose is the equipment you bought. Depending on the size of your business, equipment financing can cover huge expenses into the millions of dollars.
Bank Business Loan A Business loan is a fixed medium-term loan, typically for between 3 & 10 years, it only covers the purchase of the capital items such as machinery and initial start up stock, as well as any vehicles needed to run and provide the business. Interest is charged on any bank loan and the rate depends on UK base rate.
Private Loans A member of family may provide a loan towards the capital, however this only normally occurs when a small business is owned by a sole trader, except if a sole trader has an extremely wealthy member of their family. I may need some assistance when investing my half of the capital and may borrow from a relative; this then means I will not be paying any interest and I will be able to pay back any money I can afford to when I like.