Organisation - Financing a New Business

Author: Jim Riley Last updated: Sunday 23 September, 2012

The entrepreneur will need to finance to the business. This means they will need to find money to pay for:

The purchase of plant & machinery, office equipment etc
Renting or buying premises and offices (e.g. the first 3 months’ rent may need to be paid in advance)
Essential business services such as insurance
The purchase of stocks of raw materials and components to allow production to start
The wages and salaries of the first employees to join the business (who may be needed before any goods or services are actually sold)
To provide financial cover whilst the business waits for customers to pay

The main ways in which an entrepreneur can find finance for a new business are:

Own money
Bank loans
Bank overdraft
Money from friends
Grant assistance from government bodies

These types of finance can be split into INTERNAL and EXTERNAL sources of finance. Internal sources of finance are generated from the business itself (e.g. cash from sales) and external sources of finance from outside the business (e.g. a bank loan).

The business can also split the types of finance into categories relating to length of time the money is needed for

Short-term: bank overdraft

Medium term: bank loan; lease; hire purchase; government grants

Long term: bank loan; mortgage; share issue (for limited companies); debenture

Business Plan

A business plan sets out how a business is going to achieve its aims and objectives. It is extremely useful for a new business to use a plan because it can be used to show potential investors how their money is going to be spent.

A business plan will probably contain the following elements:

Statement of aims and objectives
Description of market the business is selling to
Main competitors (how will they respond to a new competitor?)
Production and sales forecasts
Equipment needed
Distribution plan for how to get product to customers

In the plan, great care should be taken to estimate and forecast how the cash will come into and leave the business in the early weeks and months.

This is because in the early days of setting up a business, finance is hardest to manage. It is uncertain how easy it will be to find customers – and will they buy the product or service at the price that is being asked? The business will be incurring significant “start-up costs” which will eat into the available funds.