Sound financial management is critical to the ongoing success of your business. There are several options for financing it:

• Loans from a bank or other type of financial institution
• Using your personal savings
• Borrowing money from friends and relatives
• Venture capital
• Government funding

The government doesn’t provide finance for starting up or buying a small business. However in some circumstances you may be eligible for a government grant.

Specifically detailed information can be viewed on www.business.gov.au and www.smallbiz.nsw.gov.au

You should also seek advice from a professional business advisor, accountant or solicitor.

Personal Funds

Using personal funds has obvious advantages – you will not have to make regular repayments and you have full ownership and control of your business.

Loans

Bank loans or formal loan arrangements with family or friends will need to be repaid over a contracted period of time. It will also attract interest payments. Most loans require some type of security such as your house or car. If you miss payments the lender may have the right to sell some of your assets to recoup their money.

An advantage of a secured loan is that interest can be lower than sourcing funds on an unsecured basis. Generally this interest cost will be tax deductible.

Another advantage is that the lender does not have any ownership rights and will not be involved in the day to day business running.

Short term or long term loans

Mostly it is said that the term of the loan should match the asset you are buying. Short term loans are often referred to as working capital and used for set up expenses.

Long term loans are used to buy the business, or equipment such as cars, office equipment or other machinery.

As it is likely at some point for you to need finance you should understand how banks and other lenders assess your request, so be prepared. Generally the assessment is along the lines of

• Is the borrower of good character
• How much owner’s equity does the business have?
• What security can you offer
• How will you repay the loan
• Are growth prospects good, what risks do you face.

Prepare a sound business proposal and discuss it in conjunction with your accountant or business advisor.

Controlling your Financial Commitment

Start small, keep some cash in reserve and reach breakeven point as quickly as possible. Avoid buying or leasing any stock or equipment but what is absolutely essential to begin with.

Manage your fixed costs tightly and understand which products or services are actually making money. Understand the differences between quality and quantity.

Discounting can also weaken your business if you do not calculate the real cost to your business. Discounting is no substitute for value adding products or service, or even seeking more cost effective ways of pleasing and retaining your customer. You need to know how much extra business you need to attract to cover the drop in net profit from discounting. Sometimes it is actually smarter to increase your prices and add extra value than to try and compete with others who can better afford to use discounting in some areas.

You must continue to monitor every aspect of your finances and react quickly if improvement is needed. Try to develop smarter, cheaper ways to do business and improve your margins.

Your financial advisors can assist you and help you monitor your cash flow ensuring you have smooth administrative systems in place at the start.