Many businesses are started with the simplest forms of funding – cash savings and a credit card. However, as a company begins to gain momentum, other funding and cash flow options needs to be considered to enable it to grow.
Cash flow management is critical to every business. Juggling incoming payments and ensuring that you have the cash to pay tax, staff and your incoming invoices, is at the heart of every business. Understanding the risks and options available is imperative to business success.
Cash and credit cards
There are many stories of successful companies being built with the use of a credit card, cash from friends and family or mortgaging against the family home. However, using a finite amount of cash and a credit card can only go so far in a growing business.
While they are all valid ways of funding a business, the risk associated with these options should be considered in terms of the limitations they may place on the growth of your business.
Things to consider include:
- How long will the cash sustain your business? What is rate at which this cash will burn?
- Is more cash available if the initial amount is spent entirely?
- How will the credit card debt be repaid?
- If others are putting up the cash to start the business, what are their expectations around the return of this cash?
- If the business does not thrive, will that mean the family home is lost?
Depending on the type of business, a loan may be required to start, sustain or grow. Business brokers and business banking specialists can provide advice about the best type of loan structure based on the individual nature of your business.
Always seek additional advice from your accountant before taking a business loan. Your accountant can advise on the best structure for this type of debt and explain the taxation implications that may apply.
One of the most common and unnecessary expenses incurred by small businesses are overdrawn fees on their transaction accounts. It comes back to cash flow management. Does the business have enough money in the bank account to cover all outgoing expenses?
If an incoming invoice is not paid by a specific date, and an outgoing payment is made, there may not be enough cash to cover the debt. In this instance the bank will make the outgoing payment but an overdrawn fee will be applied. By having an overdraft with a set limit, these unnecessary fees can be avoided.
Understanding the funding options available for your business will depend on your business model, your industry and your long-term strategy. Always speak to your accountant for advice about funding models.
Most banks and credit unions have business banking experts available to discuss funding options.
Financial institutions prefer to deal with specific types of companies, so it is worthwhile shopping around to find the best products that offer the best interest rate and fee structures.