Question: How can I get funding for my new business before I have experience and a track record?
Answer: Getting financial assistance at startup is nearly always difficult. The company has no track record of earnings on which to base its capacity to pay back loans, and in many cases the entrepreneur does not have significant financial resources to self fund the startup. Thus the venture either is under funded from the very beginning or not at all.. Here are some ideas that can help in the quest for funding on terms that are favorable to the needs of the entrepreneur.
The process is to develop a needs list and possible funding sources in three parts:
PART 1: The costs of setting up the business: including location, equipment, supplies, initial staffing (including owner’s salary), furniture, the services of an attorney and accountant, utilities, licenses and any other costs that may be called overhead. They are also called fixed costs due to the fact that they must be paid regardless of the level of business operations. These costs may be funded creatively such as one entrepreneur who sourced equipment on Craigslist over a period of time before starting up, and thus was able to avoid seeking a loan from the very beginning of his firm’s operations. Another might be crowd funding (sources include Kick starter, and others). It may be possible to secure grants as well but this type of financing usually takes considerable time and effort to secure support. Notice the absence of short-term bank lending in this scenario obviously family, friends, and the entrepreneur’s personal resources, as well as credit cards and collateralized loans could be included in this list. The main point is that these costs and funding sources should be considered as long-term inasmuch as repayment should be deferred as long as possible. (Note: in some cases this funding may not ever need to be repaid if it is provided as equity (ownership) in the business rather than a loan.
PART 2: The costs of operating the business. These include materials, labor, supplies, packaging, distribution, and both inbound and outbound logistics. These costs are typically regarded as variable costs, in that they are incurred primarily to service customer needs against existing or potential orders. They can be financed in a number of ways: pre payment of customer invoices, extended terms granted by a supplier for materials, long-term supply agreements (shipping, for example). Here it may be possible to obtain short-term bank credit based on customer orders which will be paid back by the receipt of customer payments.
PART 3: The revenue received from customers. The need is profitable revenue which is the life blood of the business and is therefore critical both to be received promptly and fully (no discounts). The key factor is the analysis of profitability in customer orders which is computed by the breakeven formula (the point at which revenue equals outflow) as follows: The BEP (SALES PRICE X VOLUME) = FIXED COST + VARIABLE COST X VOLUME. The answer to this equation is the level at which the firm’s inflow equals outflow, and above which profits are earned. All effort should be expended on keeping operations above breakeven.
Creatively managing fixed and variable costs can produce a viable early start to the new entrepreneurial venture, while the management of revenue and cost combined through breakeven analysis can secure profitable operations and continuous funding opportunities over the life of the business.