Estimate Start Up Cost or Cost of Expansion
Estimates of cash flow needed should be included in a business plan for each stage of development. The seed money needed should be calculated with the cost estimates of business expenses for one quarter of doing business. Map out the fixed costs and the variable costs.
Debt versus Equity Financing
There are two types of financing for businesses. Debt financing is the type that is procured for paying off debts over a term with interest. Equity financing is the type of financing procured from angel investors or venture capitalists. In exchange for their investment funding they get a ownership share in the business. Once the company gets off to a great start, often the business owner will buy out the investors share, eventually.
Debt financing must be repaid by terms of a loan to a financial institution with interest. This lender will not gain any shares or ownership interest in the business. The means of securing the loan with assets or a personal guarantee from the business owner. The main lenders of this type of loan are banks, S & Ls, Credit Unions, SBA guaranteed loans, state and local funding from governments or friends, family or associates.
There are some common elements of Equity financing to Debt Financing. Those would be the sources of equity financing which are typically friends, family, employees, clients, business partners, and colleagues. Venture Capitalists and Angel Investors are the most numerous of these sources.
What makes Equity Financing different than Debt Financing is that it raises money in exchange for shares in the business. There are no periods of repayment or specific repayment amounts to be repaid and periodic intervals.
To gain funding for a business loan, the necessary ‘evil,’ is the FICO score or the credit history. Homework should be done before an application is made to be sure that all the information in the credit history is accurate and free of errors. The history needs to also be free of late payment events. It will be difficult to obtain credit from lenders if there is a record of late payments. If there is a list of debts that were charged off or unpaid, this will also hurt the application for credit. If there are judgments against the applicant or if there are declared bankruptcies that are less than seven years old, this may also hinder a loan.