A few tips to finance your new business venture

As an accountant, I’ve been involved with hundreds of entrepreneurs setting up business for the first time.  If you are thinking of setting up a new business (or have recently done so) you’re probably full of excitement, but also anxious.  You’ll know that financing your new business is an important element of this process.  You may have secured enough working capital to get you going but have you thought about how you’re going to pay your ongoing expenses?

I see more and more business owners turning to credit cards to help finance their working capital until cash flow improves.  With credit coming back into fashion, this article discusses whether using a credit card to finance your business is a good option?  If you’re thinking of using one, here a few things to consider: 

If you’re operating a new business, it’s unlikely that it will have established any reliable “credit history” with a credit card company.  On the other hand, you may already have your own credit card and it’s highly likely that you have operated your own bank account.  Consider using these to your advantage as you may be able to obtain credit in your own name and “lend” your business this money. 

If you’ve got an excellent credit record with your bank and/or credit card company, consider using your own credit record to benefit your business.  But be careful if you’ve missed loan or credit card payments as your credit score may be damaged and make it harder to you to obtain the credit you need.  If you have a poor credit record, your application may be declined.  Keep your business’ financial health strong to ensure that it develops its own positive credit history.  But you may have to look for alternative finance sources in the meantime.   

I firmly believe that every business needs cash forecasts and budgets.  This is just as important (if not more so) for new businesses.  As the owner, you’ll need to know when payments are due and how much as well as having an idea of when you’ll be paid.  If you have no idea of your cash flow cycle, you’ll be in the dark and you may not be able to meet your credit card company’s monthly minimum payments.  Credit cards should be used with a degree of caution until your business’ cash flows and profits are stable and the company can meet its obligations.  Alternative finance options will include: loans from family and friends, personal loans or a small business loan.

When “more means less”
Most new business ventures I’ve been involved with experience a torrent of activity and financial disarray.  Filled with excitement, the “newbie” entrepreneur “must” have the latest office equipment and gadgets and then quickly runs out of the start up capital they had saved or borrowed.  You must be disciplined and frugal – otherwise you’ll have no cash left to pay your suppliers and other essential outgoings.  Schedule big capital expenses or large purchases and fight any temptation to make “impulse buys” until you’re confident that your business can afford (and needs) the item.  Laying the right foundation at the start will make a big difference to your credit history.

Do not under-estimate your financial obligations.  Many businesses have “gone to the wall” due to their owners shying away from them.  Don’t fall prey to using the business solely as a means to fund your new “self employed” lifestyle.  By all means make sure that you have a work/lifestyle balance but operate your business as a business.  Review how you’ll operate your business – it’s possible that incorporating your business will provide good tax planning opportunities as well as providing the basis to separate your business and financial affairs.  It should also give your business the opportunity to develop a separate credit history. 

Consult your accountant to make sure that you’re structured right.