Starting a business may be more costly than expected. Even if sales are high, a poor business model may never make it past the first few months. For successful startups, entrepreneurs need to plan carefully and get creative with financing.
It is very important for the entrepreneur to believe in the new startup. A venture cannot succeed without personal investment, whether that investment is monetary or simply time and attention.
Just to open the doors of a new business, a certain amount of capital is very important. Getting creative with startup financing can include many unconventional options including personal credit cards, personal savings, vendor financing, and personal loans from family and friends, investors, or the bank.
Detailed and Knowledgeable Planning
Knowledgeable planning is essential for financial success in business. One should know enough about the business that the only surprises are real-time changes in vendor pricing, laws, or other things that could not be foreseen because they haven’t happened yet. By overlooking a needed product, piece of equipment, or employee position that would completely change the budget, one has failed before he or she even began.
The Timing Game
Balancing accounts receivable and accounts payable is a very important aspect of starting a business. Often sales can be written that look very good on a profit and loss statement, but they won’t show up on the cash flows sheet for a few months. This type of business includes business-to-business sales and other contracts where the services or products are rendered at one time and payment is received at a later time. As long as there is a longer time period between when the payment is received from the buyer and the payment is due to the vender, a business can manage through the startup. Often the terms don’t match up, and in order to make the deals for long-term success it will require extensive short-term capital. This capital can come from personal savings, credit cards, or in rare occasions it would be from bank loans. Businesses that have a lot of revenue tied up in accounts receivable but no working capital can benefit from a service provided by New Century Financial. This service purchases the accounts receivable and forwards the cash needed to stay open.
Vendor Financing: a Closer Look
Vendors all want to be part of a success story, and often vendors have the capital and excess inventory to send products and then bill out on net 30 or net 60 terms. Net 30 or 60 terms mean that the business wouldn’t have to pay the vendor for 30 or 60 days after the order was placed. These types of terms are very useful to new businesses. It is important to realize that vendors need to feel comfortable and confident that they will actually get paid before they will agree to net terms. These types of net agreements are commonplace with almost all companies. The favorability of net terms can mean the difference between success and failure for any business, not just a startup. Radio Shack, for instance, is currently renegotiating their vendor financing and is even considering bankruptcy if the renegotiation doesn’t go in favor of Radio Shack.