If you’re planning to commence a startup, then obviously you’ll need some capital to finance your new business. However, one most common reason why many small businesses or startups fail is because they undercapitalize their fresh new business. So, it’s important to know how much amount of money you’ll need to start and run your startup until your revenue becomes equal to the expenses.
Ask Yourself The Following Questions
- How much amount of money do you need to invest your startup?
- Do you own any of the assets required to push your startup?
- How much amount of your own money you can use for this startup?
- Do you have any family members or friends ready to invest in your startup?
- Do you have any lines of credit available?
Equity Investment:
Equity means ownership. An investor invests money in your new venture in exchange for some amount of ownership share of your business. And, if you’re considering equity investment, then think how much of share you’re willing to give up. And remember, once you sell 51% share of your business, you’ll loose the control of your business.
So, before going down to this road, you must know all the BC laws that apply to any company or business that raises money from the investors.
Personal Savings:
When starting a new business, you’ll get most of the funding from your personal savings and/or your friends and family. As a matter of fact, more than 76% of startups in the UK are financed with personal savings in the beginning phase.
When starting out, aim to fund at least 25 or 50% of your startup from your own pocket. This proves to investors that you’re personally taking some risk and fully committed for your business success. Unlike unsecured loans for business, it’s a requirement for small business loans, which are generally secured.
What The Potential Lenders Look For…
Most lenders always look for four ‘C’s of lending’ when they are evaluating any loan application.
- Cash Flow: Lenders look your cash flow forecast which you are required to create for your business plan and based on that they judge your ability to repay the cash that you’re borrowing from lender.
- Collateral: The total value of the assets which you’re going to undertake for assurance that you will repay the lender.
- Commitment: The total money that you’re committing to your new startup. Because, you can’t just expect to get a loan from lender without contributing appropriate share yourself.
- Character: Your personal line of credit and your credit score. Your credit score is generally measured by the history of borrowing and repaying loans that you took from banks. Without a good credit score, your loan prospects reduce.
A lender usually decides how much amount to lend you by estimating your cash flow forecast, commitment and collateral. Then, they deduct your existing debts and offers you final amount. Remember that the lender looks at the limit of your credit cards, not the amount you’re presently using.
In most cases, small businesses are not luxurious in assets so you’ll require to secure business loan by some personal collaterals like vehicle or house.
The main difference between government program and the private lender is that a private lender puts more importance on commitment and collateral, while a government program reduces the demand for these by offering a government guarantee to the lender.
Conclusion: To make a good impression on lender, have a strong management showing steady business growth potential and always make the loan payments on time to build a good relationship with lender.