Financing doesn't end with startup

Tips For Small Business

December 21, 2008|By Stephen L. Rosenstein

Many new entrepreneurs associate the need for financing only with the startup phase of their business. A loan or line of credit is often a necessity to purchase equipment and supplies, lease a location and pay for marketing and administrative materials. However, outside financing also may be used to fund growth or open new locations, or to keep the business viable during an economic downturn.

As part of your long-term business planning, consider if and when supplemental financing may be needed so that you can head off a cash crunch. To plan your firm's financing needs, first decide why you need the money. For existing businesses, the most common reasons for financing include increasing working capital, preparing for seasonal peaks, purchasing new facilities or equipment and expanding sales.

How much financing will you need? Consider factors such as the type of business, stage of growth and whether the funds are to be used to increase working capital or invest in fixed assets. Next, ask yourself how and when you can repay the money. The type of financing determines how and when it will be repaid or returned to profits. Often, additional profits generated from new equipment purchased through financing go directly toward repaying the loan. An established firm operating on a seasonal sales cycle may require only short-term credit that is repaid as inventory is sold.

Lastly, consider whether you can afford the cost of the money. The income generated by financing should always outweigh interest charges or the amount of ownership given up. Keep in mind the bank lending you the money will require that you offer assets as collateral for the loan.

Your business plan can be translated into the dollars and cents of a capital expenditures budget and a projected profit and loss statement. The capital expenditures budget lists the planned purchases of facilities and equipment, plus expected physical improvements. The profit and loss projection will show a break-even point and the point at which a profit is available for reinvestment in the business.

A loss might signal a need to increase sales, tighten management, curb expenses or seek additional funds. If you project a cash deficit, check with suppliers to try to extend the credit period, or cut back on optional spending.

Stephen L. Rosenstein is co-chairman of the Greater Baltimore SCORE Chapter No. 3. Call 410-962-2233 to speak to a SCORE counselor or visit To send a question to SCORE, e-mail

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