The need for financing is a critical and perennial concern for your start-up
business. You will need "seed money" to launch the business to
cover costs such as equipment, fixtures, supplies, among others. You’ll
also require money for your daily operating expenses inventory, rent,
taxes, salaries and wages, advertising, utilities, etc.
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You can launch your business using your personal resources. But you may
find yourself quickly reaching the stage where you must look to the credit
market for financial help in sustaining and expanding your operations. The
type of financing you seek depends upon how much you need, how you plan to
use it, how long you need it and how you’ll pay it back.
One way of financing your start-up is through business or supplier
credit. Many suppliers have developed credit programs where they provide the
goods on credit; you pay for them, with interest, over a specified period.
You can get 30-days term with a limit on how much you can avail as you
develop your relationship with the supplier. However, as your business
transactions grow, the supplier can provide more lenient payment terms, such
as three months to pay or discounts for prompt payment.
Peter Hingston and Alastair Balfour in the book “Working from Home”
offer four advantages of using business credit to finance your start-up:
- You can get goods or services but not pay for them until some
specified later date.
- Helps you through lean financial periods.
- Receiving business credit helps improve your cash flow
dramatically.
- Reduces the need for short-term loans.
However, they also warn of its disadvantages.
As a new business, you may be refused business credit, as you are an
unknown credit risk. Before a credit is approved, suppliers often check your
credit rating and the credit capacity of your business. With your business
being so new, you may not have been able to establish a credit history that
reflects your repayment habits.
The supplier may still grant you the credit, but they can stipulate stiff
conditions in your contract. They may even ask you to get a guarantor to
back-up your credit line. Make an assessment concerning the affordability of
the credit at the time that the contract is entered into, not later. Always
remember that suppliers are not there to help you: rather, their main
purpose is to make a sale. Hence, they will not be interested in any
problems you may face later in the day when there are difficulties making
repayments.
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