Business Finance
So you want to start up a new business? You’ve done your research into the existing businesses and checked out your competition whilst gaining some hands on experience along the way. You’re armed with your business plan, outlining your every move from your objectives, strategies, and target market to your financial forecast. There’s just one little hurdle left to leap over, the decision and arrangement of business finance.
More and more businesses and new ventures are failing to get anywhere past the starting line. There are two main reasons why most businesses fail; poor management plans and inadequate business capital, which is why raising money is important in the early stages of a business.
So why is this need for finance so important? As a new business you will need not only a place for your business to be housed in but also all of the necessary equipment that will be needed to make sure your business is running to its fullest. This start up capital will be used to pay for:
o The renting/buying of a premises/office space, which will require payment of three months in advance.
o Any machinery or office equipment
o Business services such as insurance
o The purchase of stock
o Wages and salaries
o Any financial cover you may need while waiting for customers to use your business
In order to gain the correct business finance and to make sure that people will be willing to invest in your business it is essential to have a well structured and developed business plan. It should state how your business will be different from the competition, why people will use your business and how you will supply your customers with what they require. Research has been conducted that has found companies with a structured business plan stating their overall goals and how they plan to move their business towards them make a considerably higher profit than those that don’t.
Most avenues that you chose to go down in order to secure business finance won’t come near your business without this business plan. So what are your options when it comes to business finance? There are many options open to you but that doesn’t mean that all of them are right for you.
One of the first places that people go to for business finance is there bank. Although banks are still the most common form of business finance it doesn’t automatically mean they are the best. All banks vary in terms of what they can offer start-up businesses, so it is important to talk to a number of them before making a decision. Banks will also expect you to put some of your own money into the business; as a new business venture you may not be able to afford this.
Another form of business finance is asset financing. This is a line of credit that is secured by assets such as real estate. So as a new business venture you can use these assets as collateral to obtain capital. However if payments aren’t made your assets may be seized.
An ever popular choice of Business Finance for a new business venture is a business angel. Business Angels are called this because they often save struggling firms with both finance and advice when no one else will. Angel investors understand the needs of a new business through there own experience and are able to advice and aid the companies in many ways. Business angels are successful entrepreneurs or executives. With their skill, luck, careful planning and good management; they have turned many businesses into profitable ones.
Finally there are venture capitalists who are private investors for financing new or growing businesses and even struggling established businesses. Even though they are high risk investments they can offer the potential for above average returns and/or a percentage of ownership of the company.
Working Capital Financing
All businesses have some sort of an operating cycle. This is essentially the time it takes from purchasing needed materials or supplies and converting them into a finished product that can be sold. The operating cycle further consists of selling those products and collecting payment for all that effort. Once products are sold and payments collected, the cycle is completed.
For retail businesses (including online businesses) the cycle starts with purchasing products for resale (inventory) then displaying those products on shelves or on web pages, closing the sale and collecting payment.
Even service businesses, while their operating cycle can be much shorter, still see a time lag between providing the service (to include any purchases of material or labor to complete the job) and collecting payments from customers.
It is because of this time lag that working capital financing comes into play.
All these businesses need some form of assets, be it inventory, materials, supplies, labor, etc. (usually termed: current assets) that can quickly flow through the operating cycle and be converted into cash (revenue). This is essentially what business is. Once payment (revenue) is received, the company can then use any operating cycle profits (gross margin) to cover overhead expenses like salaries, marketing, loan payments and interest, capital purchases, or any fixed general, administration or selling expenses.
The problem that arises for most businesses (especially small and growing businesses) is not having the cash on hand to purchase the needed materials to complete their operating cycle. Not only do some businesses not have the cash or capital to purchase needed materials they may also not be able to cover other variable costs related to the operating cycle like paying labor, landlords, utilities, etc.
In a perfect world, all businesses would have the necessary financial wherewithal to cover all expense while waiting for payment. But, the business world is not perfect. Most businesses have to wait anywhere from one day to years to complete their cycles and get paid by their customers (typical operating cycles usually last from a few weeks to a few months but depend on the industry and business).
But, in the mean time, while these businesses transform goods into finished products or services and wait to be paid by their customers (or wait to see if they can even sell the products or services they offer), their suppliers and vendors, landlords, utility companies, employees, IRS, bankers, etc. all want to be paid now and not wait for the business to receive payments; keep in mind that these businesses are also facing their own time lag in their operating cycles. Thus, for businesses that do not have the cash on hand to meet these expenses, they must turn to working capital financing or face going out of business.
Working capital, by definition, is the difference between current assets and current liabilities where current liabilities are used to finance current assets; and the conversion of those current assets into revenue is what is used to pay off those current liabilities.
There are many methods to working capital financing; here are a few of the most common:
Trade Credit: The fastest and most efficient way to finance materials or supply is via trade credit. How it works is simple. You purchase goods from your vendors or suppliers. They tell you that you can delay payment for those goods for 60 days. This 60 day period will give your business time to convert those goods, via your operating cycle, into revenue in which to repay the vendor or supplier. If you are not currently getting trade credit terms from your vendors – you might think about asking for them. If you are, you might look into getting them extended. The longer the payment delay terms, the better for your business as it has more time to convert those goods into revenue.
Business Lines of Credit (BLOC) are short term revolving credit lines (usually with a 12 month or less term) and are specifically designed for working capital needs. These credit lines allow businesses to purchase needed material, supplies, labor etc., convert those into some form of revenue over a very short period and pay back the borrowed funds as soon as possible. BLOCs are usually revolving lines meaning the business can pay them down from one operating cycles and draw on the line again for another operating cycle. Most BLOCs are set for 12 month periods as these lines are meant for short-term financing only and from a banker’s prospective should be paid to zero some time during each of the business’s operating cycles.
Business Cash Advances: These cash advances are not loans but advance against future sales. These advances are great methods of working capital financing as they allow businesses to receive capital up front and pay it back from future sales. Business cash advances are usually based on the total revenue of the business but do require the business to accept credit cards as a form of payment from their customers – as it is these credit cards receipts that are used to pay back the advance. Very good working capital products for retail (online and brink and mortar) as well as service businesses.
Accounts Receivable Factoring: Some businesses may find themselves in (according to baseball terms) as pickle – stuck between waiting for customers to pay on one side and having trade partners (vendors and suppliers) demanding payment on the other side. Let’s say your business purchases materials Net 10 days – meaning that you have 10 days to pay in full for those materials. You convert those goods into finished products in 5 days and ship them to your customer with a NET 30 day invoice – meaning your customer has 30 days to pay you. In these situations, Accounts Receivable Factoring can be used to obtain the working capital needed to pay off the supplier as well as purchase additional materials for another operating cycle. Then, when payment is received by your customer, the business can repay the Accounts Receivable loan or line of credit and use the remaining gross margin profits to cover other costs and overheads. Most factoring company will advance 80% of the invoice amount and base their approval decisions on your customer’s creditworthiness.
Purchase Order Financing: Purchase Order Financing is a great method of securing working capital for a business’s operating cycle. Let’s say that your business has one or more jobs that need to be completed but finds itself without the needed working capital to complete the job(s). A purchase order factor may advance your business the funds (up to 80% of the purchase order amount) – essentially paying your supplier or variable costs on your behalf – so that you can complete the orders, satisfy your customers and earn a profit.
Lastly, and this cannot be emphasized enough, working capital financing is short-term financing and should only be used for short-term needs. Keep in mind that most operating cycles are very short periods – usually less than 90 days. Thus, any financing to be used in the operating cycles should be short-term – matching that 90 day period. Anything else is bad financial management as the business would be paying far more in interest and fees if it uses long-term financing options for short-term, working capital needs.
Comfortable Jet Charter
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When you need to travel on the air you should better choose for Business Jet Charter. It is a great option to make your business runs smoothly. The benefits of private jet charter are easy, save your time, fast and luxury in seat. By using private jets you do not need to stand in line in the front of the ticket box on the airport. You only dial the number of the online private jets travel and soon you will get your jet ready. They guarantee that you will enjoy your flight with your business partner on the luxurious cabin. You can relax on the comfortable seat and enjoy your foods or drinks calmly. There is no need to worry about your travel on the air. Their company has been known for its hospitality service. They provide all of their staffs in 24 hours a day and 7 days a week.