Creating your business funding plan

Understanding the basics of raising capital is a vital business skill. Whether you are looking to start a new business or grow your existing business, one thing is certain - you are going to need money.

You must consider many factors when exploring funding options for your business, including:

• the amount of finance required
• the nature of your project
• your stage of business development (i.e. a start-up or an established business).

The first step in securing funding is to draft a business plan. Whether you are starting a business or looking to grow your existing business, your business plan is the key document that guides your future operations. It also makes your business goals clear to potential investors or lenders and explains how you are going to spend
your invested or borrowed money (i.e. your financial strategy). 

Your overall business plan should include a detailed funding plan that explains:

Ø  How much money will be required

Ø  When the money will be required

Ø  Where the money will be sourced

Ø  What the money will be used for

Ø  When debts will be paid back

Ø  When investors can expect to see returns. 

Try to identify all the likely costs involved in your business:

Ø  Start-up capital (e.g. office equipment, plant and machinery, building costs, shop fittings, licenses, permits, premises costs)

Ø  Operating capital (e.g. salaries/wages, rent, expenses, supplies, utilities, advertising/marketing, interest repayments, depreciation)

Ø  Contingency funds – cash needed to survive rough periods until your business becomes profitable. 

There are 2 basic financing strategies you could consider:

• Debt Finance - borrowing funds that you pay back with interest within agreed time frames (e.g. bank loans)
• Equity Finance - investing your own or other stakeholder's funds into your business in exchange for partial ownership (e.g. venture capital).

 Debt Finance

Debt finance is a way you can take to finance your business. It is borrowed money that you pay back with interest within an agreed time frame. The most common forms of debt finance include bank loans, overdrafts, mortgages, and equipment leasing/hire purchase.  

Advantages of debt financing

• Maintaining ownership - unlike equity financing, debt financing gives you complete control over your business. As the business owner, you do not have to answer to investors.
• Retaining profits - your only obligation to your lender is making repayments within agreed timeframes. You do not have to share your business profits.

Disadvantages of debt financing

• Accessibility - banks are conservative when lending money. New businesses find it difficult to secure debt finance.
• Repayments - you need to be sure your business can generate enough cash to service the debt (i.e. repayments plus interest). Note, if your business fails you are still obliged to repay your debts.
• Credit rating - failing to make repayments on time will affect your credit rating, which may affect your chances of securing future loans.
• Cash flow - committing to regular repayments can affect your cash flow. Start-up businesses often experience cash flow shortages that make regular payments difficult.
• Bankruptcy - unless you have a guaranteed way of paying back your loan, any business that uses debt financing is risking potential bankruptcy. This is particularly serious if you have pledged your personal assets to secure a loan.

 Equity Finance

This is an alternative to borrowing money to fund your business (e.g. a traditional bank loan). It is investing either your own money (if you have it) or someone else's money in your business. This is called equity financing. The main difference between debt finance and equity finance is that the investor becomes a part owner of your business and shares any profit the business makes.

The main sources of equity capital are:

• Family and Friends – these people are important sources of equity for new businesses
• Angel Investors – these are wealthy individuals who invest their own funds into start-up businesses with strong growth potential
• Venture Capitalists – these are professional investors that invest funds in operating companies with high growth potential.
• Public Float – this is a means of raising capital by issuing securities (e.g. shares) to the public. 

Advantages of equity financing 

• Freedom from Debt - unlike debt finance, you don't make repayments on investments. Not having the burden of debt can be a huge advantage, particularly for small start-up businesses.
• Business Experience and Contacts - as well as funds, investors often bring valuable experience, managerial or technical skills, contacts or networks, and credibility to the business.
• Follow-up Funding - investors are often willing to provide additional funding as the business develops and grows. 

Disadvantages of equity financing

• Shared Ownership - in return for investment funds, you will have to give up some control of your business. Investors not only share profits, they also have a say in how the business is run. While this has advantages, you need to think carefully about how much control you surrender.
• Personal Relationships - accepting investment funds from family or friends can affect personal relationships if the business fails.
• Time and Money - approaching investors and becoming investment-ready is demanding. It takes time and money (so start early). Your business may suffer if you have to spend a lot of time on investment strategies.