Sources of Finance
There are several sources of finance which might be available to a new start-up business. These may vary according to the financial standing of the owner and resources that surround them.
It is important to realise that financing of a small business can take many forms, some of which are more conventional than others. Provided the objective is borne in mind; that of enabling the operations to afford one or more items, then several previously unexplored avenues might present themselves as viable solutions.
Friends, Family and Associates
This group of people might be will to lend money to the new venture, particularly in the light of the existing business have become established over time.
There might be some apprehension concerning the perceived risk of internet trading, but there may well be some enthusiasm over the prospects of the new business doing well in this environment.
Financing from friends, family and associates is usually on a short term basis, for periods of one year of less (unless the donor is wealthy).
As such, these funds might be suitable for buying items of stock for resale where a short buying and selling circle can be predicted and thus ensure that the money is on hand to repay the debt at the agreed time.
Whilst friends and family might be willing to loan money on the basis of little or no return for their investment, business associates would probably require the payment of additional amounts, over and above what they originally lent.
This could create additional pressures on the business particularly if the loan is for a few months instead of for one year or more.
In exceptional circumstances, the associate could request a shareholding and a managerial role in the new venture. This might be welcomed depending on the business skills processed by the associate and level of need which exists for their financial backing.
Given that the senior management of the existing business has not been split between several directors, whether or not such a change in this practice could be accommodated would have to be considered.
Trade Credit
Credit for trade suppliers could be a useful source of short term financing for the new venture.
Contacts and reputation built up through the existing established business could be utilised to provide the new venture with credit arrangements which most new operations could not obtain.
Such arrangements and facilities could take the form of a number of days extended credit of perhaps forty five days instead of the traditional thirty, a sale or return agreement or perhaps enhanced discounts given the increased overall quantities which might be sourced from a particular supplier.
Despite having good relationships with others within the industry, it is unlikely that such contacts could be significant in providing longer term funding required for the premises or major items of machinery.
Loans from Financial Institutions
Loans from financial institutions such as banks are a common source of funding for new business ventures.
Short term loans and overdrafts might be ideal for the initial purchases of stock and other working capital requirements such as salaries for selling and administrative staff.
Medium term loans (those ranging from one to five years) might be used for the purchase of the new equipment assuming that they will remain in operational use during the term of the loan.
The basis here is that as the machinery contributes to the generation of revenue for the new venture, the repayment of the loan is matched to this income.
Using short term finance for these medium term assets would place the business under some strain as it sought to pay for items which had not yet had the full opportunity of generate sufficient income.
The website costs both the initial set-up and ongoing running costs are likely to be significant. As well as providing detailed information about each car part probably with photographs, a shopping cart facility will be required.
The initial set-up might require medium term (in this case one to two years) financing as the costs of development, artwork and hosting may not be recouped within a few months and the website structure may server the new venture for several years.
Ongoing website maintenance costs such as adding and removing new products and images should most likely be borne out of the business’ working capital.
Long term loans from a bank or other financial institution would be a suitable course of action should the intension exist to purchase the required premise outright.
Depending on the value and how much is needed to buy the building a loan of anything from ten to twenty five years might be in line with a prudent and realistic repayment schedule.
Just as short term finance is generally unsuitable for the purchase of medium to long life assets, the use of long term borrowing for working capital requirements can result in the business paying interest on monies which it no longer requires.
Long term loans should therefore be reserved for substantial and long life business assets.
Similar to the aspects of gaining trade credit, approaches made to banks where existing good relationships already exist might aid the new venture both in terms of gaining the necessary finance and in terms of securing favourable interest and repayment terms.
Leasing
Leasing is a frequently used method of gaining use of costly machinery without the need to buy it outright.
Although this method can work out more expensive over time compared to purchasing the items outright, leasing can provide significant cash flow benefits as the initial outlay is often small by comparison.
Depending on the terms of the lease, the lessor may be responsible for repairs to the machinery and thus remove this burden from the new venture.
Leasing contacts for machinery usually range from a three to five year term and hence represent a medium term funding option for the business.