Early on, every startup runs into the same problem: financing. You might have the best idea in the world, but how do you finance your startup to turn that idea into a working business? What’s more, once you get set up, you might run into unforeseen expenses that could pose a threat to your business’s existence. You need to know how to face these problems so you can overcome them and help your business grow successfully instead of going under.
Come Up With a Good Business Plan
First things first, you need to set up a suitable amount of financing for your startup. A great number of new startups fail to realize just how much their business is going to cost on a monthly basis, and they end up underestimating their operating costs. Naturally, when you are just starting out, unforeseen costs are the last thing you want to be worrying about. However, they could throw a real wrench in the works when it comes to getting your startup off the ground.
How do you keep going when the money you need simply isn’t there? For that reason, you need to ensure you take everything into consideration. One easy way of getting started is to take a look at the annual reports for publicly traded companies that are doing something similar to you. While they will be spending much more money than you have right now, the basic categories of their expenses will be pretty much the same.
Factor In Overspending
Another way of avoiding this problem is actually to plan for some overspending as part of your business plan. Instead of being optimistic about how much you might make from month to month, cut your projected profit margins in half. Therefore, when it comes to spending, you’re able to ensure you only plan for the money you actually have. While it’s likely you’ll exceed these projections if you’re doing things right, it’s better to be safe than sorry.
In a worst-case scenario, you are able to make ends meet while you take care of any problems you might be experiencing. In a best-case scenario, you’ll have some extra money in the bank to expand your business.
How Factoring Can Help With Unexpected Costs
As much as you might plan things out, though, there will inevitably be times when things go wrong. To deal with these situations, you need to know your options in advance so you can make the right decision under pressure. One option with financing is accounts retrievable financing, or “factoring” as it’s more commonly known. Factoring is a flexible financing method that’s useful for companies who have exhausted alternative options.
Many traditional lenders only deal with established, sizeable companies. It makes sense, since they’re looking to get their money back, and these larger companies are more reliable. However, that leaves startups and small businesses in a tough situation, where they are unable to secure the money they need.
That’s where factoring can be a big help. In essence, factoring from a recourse lender involves receiving a factoring line of credit from a third party, who will then be paid back via your client invoices. Although you will pay a small fee for factoring (after all, the factoring company needs to make money on the transaction), it means you get the money from them up front, instead of having to wait for it.
Factoring is a useful financing method for when you are facing unexpected costs and need the capital to cover them quickly. It shouldn’t be your default option, since it is a more expensive method of financing than most, but it’s something to keep in mind in case you should need it.
Price Your Products Correctly
Once you’ve got your financing settled, then you need to calculate the pricing of your products or services properly. Although it’s tempting to come up with prices just by taking the costs and adding on what you think is a fair profit margin, that’s actually a very simplistic way of doing things. It could come back to bite you in the long run. You need to make sure that not only is your business turning a profit but also that your services are competitively priced to ensure customers come to you in the first place.
Take the time to do your research on what competitors charge for the same products and services as you do, and think about the “value proposition”: Will customers be willing to pay what you are asking? Decide what niche you want for your startup, whether that’s offering a premium-quality service with the associated price tag or attracting new customers with great value for money. Remember, you need to strike a balance between what consumers are willing to pay and how much you need to turn a profit.
Plan For the Worst
Your financing problems don’t just end once you are set up, though. Your costs might not scale steadily alongside your profits, and although your business might get bigger, you might find that your profits start to go down or even get you into financial difficulties. For this reason, at some point, it’s a good idea to draw up a list of all your fixed costs and those that are variable. As we mentioned above, planning for the worst will mean you’re always prepared, and at best, it means you’ll beat your profit predictions.
The right way forward with financing, then, is to play it smart. You can’t predict eventuality, but you can ensure you’re prepared for whatever you might be faced with. By budgeting to allow for a larger margin before losses start to have a real impact on your business’s finances, you won’t be under so much pressure, and therefore you can focus more on getting your business off the ground successfully.
If you find yourself in a difficult situation, then factoring is always an option to tide you over until you’ve sorted out the problems you are facing. If you have additional questions about how recourse factoring can benefit your startup, the team at FSW Funding will happily assist you and provide you with added guidance. Educate yourself about all the costs you might face as well as your financing options, and you’ll be giving your startup the best possible chance of success.