Determining the Financial Needs of a New Business

Starting your own business can be extremely rewarding, exciting, and at the same time, challenging. One of the biggest challenges of launching a new business is ensuring that you will have ad-equate money to see you through the difficult first months or even a year.

Without enough financial resources, your company can find it very hard to find its footing. As an entrepreneur, you also need to be sensible about how long it will take for incomes to catch up to expenses. You may have to encounter losses for a year – perhaps longer – and you’ll definitely need funds to tide you over.

In order to make sure you’ve enough money, it is crucial to determine the costs of doing business and research your financial options.

Source: The Balance

Estimate costs of your start-up

Having a good understanding of the economics of your new venture is very essential when thinking about financing. Also, knowing the goals of your business, the story behind it, and what you require to get there can be compelling to loan lenders. To determine your new business financial needs, you have to:

a) Calculate the one-time expenses

These are expenses that will only occur at the beginning of opening your new business. They may include professional and legal expenses for registering or incorporating your company; long-term assets like machinery, real estate, or a vehicle; consulting services; web design; office equipment and supplies; permit fees and license; advertising; market search; mileage; and training.

b) Determine the recurring costs

These are expenses that you’ll have to pay again and again, generally on a weekly, monthly, or bi-weekly basis. They include costs of wages, insurance, and utilities, professional fees, etc.

c) Ascertain whether costs are variables, or fixed

Variables costs are those that will change over time, such as insurance packaging\shipping and wages. Fixed expenses are those that won’t change. Your administrative costs or costs of your utilities are good examples of fixed costs. If you want to keep the information organised, then consider creating a spreadsheet using excel in a way that you can view in many ways (line graph, bar graph, etc.)

d) Create a business balance sheet

If you’re launching a small business, consider writing out balance sheets. It should include equity, liability, and assets. Each of these categories will assist you in keeping track of your finances and make it simpler for you to pay bills.

Equity = Assets (Current assets + fixed assets) – liabilities (current liabilities + non-current liabilities)

e) Develop a business cash flow analysis

Nothing is more important in a business than cash flow. Cash flow measures funds coming into (inflow) and flowing out (outflow) of your business. This is broken down into financing activities, investment activities, and operational activities. The analysis will aid you to know when you break even so that you can start expanding your company or reinvesting.

Reasons why you may not (or may) need funding


a) What is the nature of your need?

Knowing the nature of your need prior to seeking funding can significantly aid you and your lender. Having a good understanding of how you’ll make use of the funds you receive can help you get the most out of your financing. You will also be able to tell your loan lender what your plan is for using the funds and how it won’t only assist you to grow your company but also make sure you pay back your loan.

b) How urgent is the need?

At times, the urgency of your financing need can determine what type of loan lender to work with. For instance, if you need a small but fast loan, traditional banks are probably not a great option since they take months. There are other available alternative methods of lending that have fast turnaround times, although their rates are usually high.

c) Is your new business cyclical or seasonal?

A seasonal business usually is short-term and mostly consists of small loans. Knowing that your company is cyclical can help you when securing loans.

All this goes back to cash flow. If you’ve got a strong understanding of when money is exiting and entering your company bank account allows loan lenders know that you’re more likely to repay your loan.

Types of business financing available

Source: Barclays

a) Family and friends

Most new entrepreneurs depend on working capital from friends and family – sometimes referred to as love money. Friends and family often do not mind waiting to be paid back until operating profits begin rolling in; however, it can be hard to mix personal relationships with business.

b) Personal investment

Many start-ups need some personal investment by the owner – either personal assets\valuables used as collateral to secure funding or cash.

c) Debt funding

Lenders provide various types of debt funding, including lines of credit and term loans. Some lenders provide loans particularly designed for a new venture, which comes with flexible payback terms.

d) Grants & subsidies

Some businesses may be eligible\qualified for government grants and subsidies to assist with start-up expenses.

e) Equity financing

Equity financing typically comes from other companies or primary investors. They will inject your venture with funds, in exchange for part-ownership of your new company. Equity investors can help you decrease your personal risk. However, they will want to interfere or rather change some aspects of your company model.

A good idea here would be to consult an investment banker. Investment banks have many functions, and one of them is matching up buyers and sellers, and doing equity research. If you want to know more about investment banking Wall Street Prep has a wonderful guide on it’s functions and changes since 2008. Besides that, you can learn more here.

An alternative to consider

Source: Akeo Lending

Let’s be honest. There are many alternative finance options and venture capital funding, which you may want to consider; however, you may face a challenge.

This is because you’re starting up a new business, and you have no accounts or trading history to demonstrate that the company will be able to pay back a loan.

Luckily, Rangewell can provide a solution for you. Rangewell are finance experts that can help you find loan lenders who are willing to lend to start-ups. Visit their website, here, to discuss your plans.