Wednesday, February 23, 2011

How to Finance a Start-Up Business: The Right Funding

Every entrepreneur I have talked to has said that finding finance to start up their business was/is the biggest challenge they had/have to overcome to make their dream of owning their own business a reality Start up finance for a business is difficult to come by and more so for the youth and women who generally are not taken seriously by financial institutions.
Most entrepreneurs have either used their own savings or borrowed from family members.
Today though, there are alternative sources, programs and   institutions that are providing start up finance to help budding entrepreneurs establish their own business. I have noticed that due to the relative ease of find financing options people often go after the wrong type of financing for their kind of business. This can lead to high cost of the money in the interest charged or they will have to give up majority ownership in the business in which case they would basically be an employee of the business/company.
With this in mind, I thought you might want to consider certain factors in choosing the type that’s “just right.” To help you, I have highlighted various financing options that might fit your business.

First of all, plan on enough money to keep your business running for three to six months before you get any income out of it. Often your start up cost exceeds the amount you thought it would take so it is a good idea to add 20% onto the budget and then work within the limit.
Going Personal
In most cases financing a startup using your own money is the only way to get your business off the ground. It may take some ingenious ways to make your start up money. You may have to pick up part time jobs, sacrifice on expensive luxury items, use your severance pay or your retirement savings. By using your own money, you risk your own finances but you retain control of your business.
 Family and Friends
When you do not have your own money you can consider asking your rich relative(s) for a little help. This option is convenient, has very few contractual strings attached and could be quickly available. The only thing to do is to be careful. Stay professional and forthright in your communication. Keep in mind that business has risks and that preserving your relationships with relative(s) is as important as your business opportunity. Also, this option is normally a limited one-time source of funding and it could turn ugly if you lose your relative(s) money.
Loan programs for the youth
It is now ease for the youth to access loans courtesy of the Youth Enterprise Development Fund. It targets individuals, groups, start ups and expansions. It is aimed specifically at the youth who generally do not qualify through the traditional financial channels. The program also provides entrepreneurial business training and how to run a business well. This fund is not for free, it is channeled through intermediaries who charge a management fee and the interest rates ranging from 5% to 8%. Visit: www.youthfund.go.ke
Loan programs for women
 For women entrepreneurs, the Government has launched the Sh1 billion (USD 16 million) Women Enterprise Development Fund. The fund is meant to empower women so that they are able to engage more in development. One can access the fund through 12 micro-finance institutions that would then give out loans to the women.
The fund allows women to borrow money to engage in businesses at very reasonable interest rates without the requirements of cumbersome sureties and other bureaucratic quagmires. Find more information by visiting: www.gender.go.ke…/Women-Enterprise-Fund…/Intro-Women-Enterprise-Fund-wef.html
Strategic Investors
In my earlier blog I mentioned that adding a business partner can be a good strategy for getting cash for the business and diversifying your asset base. Apart from the access to money you also could access benefits like manufacturing, distribution, and marketing and also enhance your credibility in the industry
Only be beware that the partner or investor does not swamp your business with opportunity, seduce you into reallocating your business’s resources in a way that suits them.
Venture Capitalists
Venture capital firms invest money in businesses and expect a handsome return on their investments. They provide capital, absorb the initial financing risk and the sell the shares when the business becomes profitable. To an entrepreneur like you, they come with network and money .They also have more money if you need more to grow .However keep in mind that their funding is very time-sensitive and as such your startup business must be a “fast growth”. You must be interested in selling the business or going public within three to five years and finally be prepared to share control.
Debt Financing/Financial Institutions
A majority of new small businesses opt for debt financing through financial institutions. Banks can provide you with a loan that comes with a repayment schedule and an interest rate. They are keen on how you will repay them and hence will look carefully at your business’s cash flow, collateral and the liquidity of your assets. You also must have a sensible, written business plan, and you must know your financial situation back to front. With the banks you don’t have to give up equity. The downside is that you must pay interest, and may require personal collateral such as a parcel of land or a home.
Before you decide on the best financing option , do your homework, choose wisely, ask for the right amount from the right source at the right time, and you will get the financing for your business that’s "just right" and be well on your way to business success!
Leave your comment and add other financing options.

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