Financing your first business

Making the move away from being an employee to an employer can be an exciting but complex experience. Existing business owners have worked out what works for their business needs and as such will have different financing approaches to you who may be financing your first business. However, with some smart planning and analysis you can quickly ascertain the best path for you and your business goals.

Choosing a side

Generally speaking, you have two options to decide from when it comes to financing your first business. These options are debt finance or equity finance and both have clear advantages/disadvantages that will either be important to you or not depending on your business goals and financial situation.

  1. Debt finance

Just like buying a home, financing your first business is achievable through a loan/repayment system from a variety of sources, often with interest added to your repayments.

With a loan, you have full control of your business and don't have to accommodate the needs of your investors in managing your business. Not having the possible expertise and oversight of investors may prove to be a negative if you lack experience.
Interest on the loan for your business may be tax deductible, as well as other costs. See your accountant for details on this as it may influence your financing decision. Cash-flow is often a key cause for concern when starting a business. Regular loan repayments may jeopardize your ability to properly manage your business. Assess your immediate/projected costs to see estimate the extent of your cash-flow needs.
There is relative freedom in the makeup of the loan, whether it be short term or long term. A loan may be high risk if you secure it against collateral, such as your own home. Establish just how big a risk it is before placing what matters to you most on the line.
You don't have to share your profits, or your company, with anyone else. You have a greater sense of the business being 'yours'. The growth potential of your business, which can be significant in its early stages, may be compromised by your restricted cash-flow.
The loan may have a time period in which you must repay it.
You may find it hard to secure enough financing for your business through a loan, and end up having to find an investor anyway. It may be worth considering the benefit of securing the business' finances entirely through investors if this be the case.

       2. Equity finance

In place of finding a lender to whom you will need to be regular repayments to (with interest), you can alternatively secure financing through one or more investors, and these can take a number of forms. You may secure financing through friends, family, business partners, venture capitalists, accelerator programs, public floating or crowd funding.

There can be large benefits for the growth/marketing of your company if you have the financial/managerial backing of one or more investors with networks and experience in your field. It is rare to find an investor who does not want some sort of controlling interest in your business, as it is their money they are investing.
Your initial cash flow is increased by not having to pay back loan repayments, allowing you the financial freedom to grow your business and more freedom to learn from your mistakes. While the process of securing a loan may be difficult, so is the process of finding an investor/s for your business.
You may enjoy the expertise of your investors, who may want to take on an advisor's role in your business. This expertise, coupled with increased cash flow, makes your business a low-risk business compared to starting out on your own, You may need to find multiple investors, and thus juggle their competing interests in your company.
You do not have a set time period in which to pay back a loan, rather your outgoings to investors lie more sustainably with the growth of your business. You will have the extra job, which you may not have considered, of managing your investors. Without time to do this, you may need to hire someone, thus compromising your overheads.

To establish which one of these options suits your business goals and financial situation, you need to produce a clear budget for yourself that outlines what sort of financing you actually need to successfully start and grow your first business.

1. How much will your rent be?

2. What costs will be associated with the establishment of the business, such as fitout/furniture, equipment (computers and IT systems), wages (including super and your own wage), as well as administration costs (legal fees, accounting fees, utility costs, marketing costs, subscriptions etc.) Try to be as thorough as you can in establishing what possible costs you may encounter and whether there is a way around these costs to reduce your risk of a stalled cash-flow.

3. Can you receive any government help in the form of schemes for first business owners? Will this effect your investment/loan requirements?

4. What is your experience in the industry within which you are starting a business? Could you benefit from an investor’s guidance?

Once you know exactly how much money you have and how much you will need to establish and then not only run but grow your business, you may have a greater sense of whether you want to go down one or both of the debt/equity financing avenues.

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