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      Careful financial planning is crucial when establishing a new business venture, not only in the start-up stage as discussed in chapter 3, but continually once your business is established. Planning or forecasting your revenues and expenses may seem like an impossible challenge for the new business owner because there is no financial history to base your forecast on, but it can and must be done. You need to have two simple issues in mind as you start your new venture: what the costs are and what revenues you can expect from your business. This chapter discusses some reasons for forecasting sales and expenses for your new venture.

      Financing Your Venture

      Most business funding comes from a combination of personal savings, family and friends, financial institutions, business partners, and private investors. Before you think about borrowing money, keep in mind the risks involved. As a small-business owner, you should always feel a little bit uneasy about debt and work hard to keep it under control. If it is necessary to borrow money, borrow only what you need and only when you need it. Following are several options for financing your business venture.

      Personal savings

      The ideal situation for starting a new business is financing it yourself. If you have the personal resources to run your business until it returns a profit, you will have no lenders to answer to, no bank interest to pay, and no financial responsibilities other than to yourself and your company. There is no better or less stressful way to start a new enterprise than debt free.

      If the financial demands of your new business are small, you might want to consider waiting until you have the savings to independently finance your venture. If you are starting a larger venture that needs more initial capital, it will still be necessary to show potential lenders and investors that you have something more to invest than just your ideas and time.

      Family and friends

      Many small-business ventures start with the generosity of family and friends. Most often this type of financing takes the form of a loan on trust, accepted in good faith, with no collateral required. There is always a danger in mixing business financing with personal relationships, so this option should be approached with careful consideration; the terms and conditions of the loan should be reasonable and negotiated in a businesslike manner. Have a lawyer prepare a legal promissory note that outlines all the terms and conditions.

      Most important, be certain you will be able to pay the money back on time and in full. Before accepting the loan, think about a backup payment plan should the business be unable to repay the debt.

      Financial institutions

      The most logical approach to securing a loan from a financial institution is to select one where you already have a history of responsible financial dealings and an already established relationship with the manager or loans officer.

      Be well prepared when you approach any potential lender. Have a clear, concise, typed, well-presented business plan. Present the lender with your sales and cash flow projections, and explain precisely how much money you want to borrow and why. Be very specific and show how your business can be expected to generate the cash to repay the loan.

      Be prepared to show statements of your personal net worth and what other financial resources you have available to start up your business. If you want to win the confidence of the bank manager or loans officer, be prepared to answer all questions truthfully and candidly.

      It is unlikely that you will be able to secure a bank loan unless you have some tangible assets as security. If you own a home and are willing to mortgage it, or mortgage it further, a lender is more likely to make funds available.

      When you borrow money for your new business, you are personally liable to pay it back. Even if your company is incorporated, the lender will require a personal guarantee from you. If a bank or credit union agrees to grant you a loan, it will usually require you to take out property and liability insurance on your business and a life insurance policy on yourself, naming the bank as beneficiary.

      A financial institution may come up with a variety of reasons for turning down your request for a loan. If you do not succeed at the first lender you try, go to others. Ask why you are being turned down for financing and make adjustments accordingly. Perhaps you need to revamp your business plan or start your business on a smaller scale. You may also want to consider taking out a personal loan. This is sometimes the easiest method for many small-business entrepreneurs to secure financing, especially when the amount needed for start-up is small. To receive a personal loan, you will still need to have collateral and satisfy the bank of your ability to pay. However, you will not need to provide the bank with a business plan or to go into the details of your proposed venture.

      Private investors

      Going into business with someone you know can be difficult; starting a business with someone you don’t know can be impossible and usually comes with stringent conditions. The best source for finding private investors is your accountant. People with money to invest in small start-up ventures often rely on their accountants for advice.

      Expect such investors to be cautious and to attach conditions to the loan. Their approach to lending money to a small business is similar to that of a bank, and you will need to provide them with the same type of information you would provide to a loan officer with any financial institution. Note that private investors seldom invest in a small-business venture unless there is a possibility of a greater than average return on investment.

      Government

      The governments of both the United States and Canada provide financial assistance to small business.

      In the United States, the Small Business Administration (SBA) exists to help small business educationally and financially. You should check your phone book for the office nearest you and see a counselor for current information on funding. You can also call the SBA’s Small Business Answer Desk at 1-800-827-5722.

      In Canada, money for small business comes from a variety of government departments both provincial and federal. Check the small-business development department of your provincial government.

      It should be noted that most government lending is done as “last resort” lending. It often takes the form of loan guarantees rather than direct loans. You may have to prove you were unable to obtain money from other sources. Generally, the government will expect that you have some of your own money invested in the enterprise. There may also be restrictions on the type of businesses that receive funding. Learn what programs are available through the various levels of government.

      Before approaching any government lending department for funds, prepare proper

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