One of the first lessons learned when starting a new business is that cash rules everything around you. No matter the market, money is ultimately the driving force behind a business’s longevity and success. Whether you’re working as a sole trader providing small services in your local area, or running a large-scale retail operation stretching from Staten Island to Shaolin; you won’t get far without some form of initial funding. In fact, having little or no capital is the primary reason why businesses fail.
It makes sense, then, that you should start seriously considering your potential investment options from the outset. Especially if your business will require significant capital expenditure.
According to Canadian banker and prominent financial blogger Roger Downie, your start-up capital should cover all of your plant, equipment and leasehold costs, alongside a minimum of six months worth of projected operational costs – including your salary. You’ll need to identify and quantify the capital that’ll get you to a point of breaking even and beyond. Downie suggests adding another 50% on top of your break-even figure to get close to your total costing. More money equals fewer problems when it comes to start-up capital.
Raising the money can be a difficult process, you’ll need to be both well prepared for the trying process of acquiring the funding and for the obligation that comes with getting it.
So, if you’re looking to secure funding for your small business, where do you begin?
First, you need to decide where you’re going to get your money from.
Where to Access Small Business Capital
For small business owners, start-up capital is most commonly raised through personal savings, loans from family members or retirement funds, but there is a wide range of options to choose from.
- Personal Savings/Retirement Funds
- Credit Card Loans
- Bank Loans and Credit
- Government Grants and Small Business Loans
- Venture Capitalists and Angel Investors
- Friends and Family
- Peer to Peer Lenders
The funding landscape is now more rife with possibilities than ever before, and no doubt there are other less traditional opportunities that are equally worth researching.
The perfect choice for you will be out there, but before you get your money right, ensure that you’ve weighed up the risks and benefits of each choice and that you fully understand the potential implications for your business.
For instance, Venture Capitalists, although popular in the 90’s dot-com boom now represent just over 1% of all active investment in businesses. They usually demand a significant equity in your company in exchange for funding, and you will need to pass a rigorous screening process in order to qualify. Similarly, the crowdfunding route may not be a viable means of securing funding within the jurisdiction of your country.
The Issues with Accessing Capital for your Small Business
As we stated before, securing capital isn’t as easy as just asking for it. Applying for funding can often be a complex and lengthy process, full of complications. Let’s take a look at the potential hurdles you may face within the application process using a specific example.
A bank can be an immensely useful source of funding, offering a choice of funding services to help develop your business grow which include:
- Small Business Loans
These provide a specific amount of credit to purchase assets or meet financing needs. The loan is repaid based on a predetermined schedule or through monthly principal and interest payments. Interest rates are usually fixed for the life of the loan.
- Lines of Credit or Business Overdrafts
These tend to be used for periodic financing. You can borrow up to your credit limit whenever needed.
- Equipment Financing
Buying equipment can be a good option if you expect it to have a long, useful life. You may also benefit from financial advantages such as depreciation and tax deductions.
- Real Estate Loans (mortgages)
These are loans for purchasing land or commercial property.
A bank loan is one of the most popular ways small businesses fund their startup cash, but that isn’t to say it’s an easy thing to do.
Your major hurdle when it comes to securing a bank loan, or any capital, is proving that your business is a good bet. Essentially, they want to know where the money will be spent, that it will be a worthwhile investment, and that they’re going to get it back.
The first step in this process, specific to a bank loan, is to secure the loan. All this means is that to provide proof of reimbursement, you’ll have to offer something of value as collateral. This could be your company’s inventory or accounts receivable ledger.
This itself is not a transaction to enter into lightly. If you then fail to repay the loan, your collateral may be taken by the bank. Dependent on what you offered, this could mean you have to sell your stock, lose your income, or even your house.
Banks are understandably more cautious about lending in the wake of the financial crash, so there are certain hoops you will have to jump through in order to prove yourself to be a viable and successful business, capable of returning the investment.
Primary amongst them is having a valid record of your business accounting. Some banks are more likely to give you a loan if you have an existing account with them, as they can use this to easily check your past financial record.
Whoever lends you money will want to know you’re serious about investing it to grow your business. They will also want to know that you’ll be able to pay back the loan principal and the interest. This will require you to present a record of your past and current business accounting, future forecasts, and repayment plans amongst other evidentiary support.
Usually, collating all this information would use up valuable time and resources. Organising old ledgers, reconciling old expenses and finding proof, may not even be enough to provide a solid enough report to successfully secure a bank loan. With Xero accounting software, however, these processes are fully automated, meaning that you have a clear and concise, and immediately trustworthy, online record of your business transactions going as far back as you’ve had the software.
How to Use Xero Accounting to Secure a Small Business Loan
The core features of Xero, as well as elevating the daily operations of your business, can act as a key factor in successfully securing your small business loan.
One of Xero’s most basic functions, the ability to automate your books by setting up in-software records of every financial transaction – even linking directly to your bank accounts – can act as the vital evidentiary support of your good accounting.
Having your finances in order, clean books and a valid source of data are requisites when applying for a bank loan; and having that data flowing into the bank uninterrupted helps provide a credible source. Showing that not only is your business well managed, but ensuring that it shows up as well managed to the bank.
Moreover, using Xero can help you prepare for the inevitable questions you’ll face from the bank, and other finance streams, throughout your application, such as:
- How much money do you want to raise?
- Will you be able to provide any collateral? What are your assets?
- Are you looking for debt, equity or other financing?
- How long have you been in business?
- What is your revenue?
- What’s your cost forecast?
Xero will automatically provide you with forecasts of your revenue and costs on its homepage, with the option to extend these over the next quarter. Using this information to test out financial scenarios, will help you to analyse what funding your company really needs and to convince lenders that you have a solid business plan in place for future repayment.
Essentially, Xero accounting software takes the process of applying for a loan or funding and simplifies it, halving the time it would most likely take you using an old ledger system, whilst multiplying your chance of success.
As specialist small business and qualified Xero accountants, we can advise you on the process of transitioning over to Xero, or even on applying for small business capital, and stay with you every step of the way.