Find Adequate Business Start Up Money
Unless you personally have deep pockets, such as inherited wealth, figuring out where you’re going to get the money to start your own business and getting the financing in place beforehand is going to be one of the most important components of planning your business.
Finding adequate business start up money is especially critical because there’s no guarantee that your business is going to make money right away, and certainly no guarantee that your new business will bring in enough money for you and your family to live on. You can’t start a business without start-up capital, the total amount of money you need to open your doors for business, and to keep them open until sufficient revenue can be depended on.
You’re also going to need operating capital to start a business, the amount of money it takes to keep the business going. Operating capital includes expenses such as salaries, wages, rent, expenses, supplies, utilities, advertising, depreciation, and interest payments. Small business advisors recommend that start-up expenses include at least six months operating capital.
If you don’t have deep pockets of your own, where do you get the business start-up money you need? According to a 1998 study of small- and medium-sized enterprises by Thompson Lightstone and Company, fifty percent of small- and medium-sized business owners report that they currently borrow from a financial institution, such as a bank. Twelve percent of SMEs finance their companies through private loans from friends or relatives and three percent by loans from non-related individuals. Forty-one percent use personal credit cards to finance their businesses.
Personal assets, such as savings, (including RRSPs, pension funds, severance allowances), remortgaging property, credit cards, and personal property, are the most common initial source of business start up money for small businesses. This may be because people starting new businesses have no alternative; if you don’t have much collateral or an established credit history, getting a small business loan can be difficult. (See my article, How to Get a Small Business Loan, to learn how to increase your chances of making a successful small business loan application.)
In Right From Home: How To Start a Successful Home-Based Business, Barbara Mowat and Ted James state that money borrowed from family, relatives and friends makes up more than fifty percent of the loans to home-based businesses. They advise avoiding misunderstandings and bad feelings by always getting agreements about loans in writing and making sure that all loans are set up with proper security, any terms or conditions, and a payment schedule. This is sound advice to follow whenever you borrow money.
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