If you’re considering setting up your own business, one of the most important parts of your business plan is how you will fund what you want to do.
Taking into account the amount of money that will be coming in at the start, many businesses choose to borrow funds to either get started or to ensure that they will be able to keep going in the crucial first few months.
A Start Up Loan is particularly useful if you need money to cover your costs whilst you fulfil a contract or order which has guaranteed income at the end of it – particularly if the income will give you a higher return on investment than the amount you have borrowed.
Once you have a loan, what should you do with it?
The types of things that start ups often spend their loans on include:
1. Equipment and technology
Whether you’re setting up an agency or a distribution company, you could need all sorts of equipment in order to be able to actually carry out the work that you need to do. This may include machinery, computer equipment, design software, vehicles and tools, to give just a few examples. However, once you’ve bought these things, they’re an investment and something that you’re unlikely to need to re-purchase for a long time (especially if you make sure that they are insured).
2. Inventory and supplies
In order to sell something you of course need to have something to sell. Whether you’re manufacturing goods yourself or purchasing them to sell on, you usually need capital to buy these items or the components to make them before you can start selling them. You may also find that you receive orders for more items than you have available to sell, which will mean that you need to create/purchase extra goods or material before you can meet the demand.
3. Land and space
Not everyone can start up a business from their bedroom. If you’re in the position where you need space to store products or to carry out services, renting a premises is a logical thing to do.
There are of course risks associated with renting. You will need to make sure that you can commit to the length of the lease and similarly, that the lease isn’t going to end and leave you without premises to operate from.
It’s not always possible to do everything yourself. Investing in the right people can mean that they help you to make far more money than you would be able to with your time and skills alone.
5. Legal documentation
If you are trading goods or services, it’s a good idea to get legal documentation such as terms and conditions in place. This makes it easier to chase customers or clients for payment, as you will have laid out terms for this before agreeing to trade with them. Similarly, if you have decided to go into business with someone else or bring in an external investor, then a shareholders agreement may be necessary to lay out who will have the final say when making key business decisions.
How not to spend your loan
If you find that your loan is being spent on things that you didn’t intend to use it for, such as paying suppliers because your cash flow isn’t what you expected it to be, make sure that this doesn’t set you on a slippery slope to insolvency.
The Liquidation Advice Centre is run by Licensed Insolvency Practitioners who provide advice, expertise and support to company directors facing financial difficulty. Insolvency issues are handled sensitively through the correct processes, so that clients are able to prevent situations from becoming worse and regain control.