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 Financing a Business                                                                                    

Start-up capital is the money you need to start your business. At the implementation stage of your business it is mandatory to know how much start-up capital you need.

You need investment capital for:

• Business premises;

• Equipment;

• Stock of raw materials;

• Wages;

• Promotions.

Business premises

After knowing what sort of premises you require, you should make decision whether to:

• Construct the premises;

• Buy the premises;

• Rent the premises or

• Run the business in your home.

Your financial capacity determines which one of the above alternatives to choose from.
 

Equipment

Equipment is all the machines, tools, workshop fittings, office furniture, etc. that your business needs. After deciding what sort of equipment you need, you should decide if you need to:

• Buy equipment or

• Lease equipment.

Leasing is like renting where the leasing company will lease the equipment to you for an agreed time period. You pay a monthly lease, just like paying rent. In the absence of leasing opportunities, you may also consider the possibility of going to other enterprises with sufficient number of equipment and use their facilities for a fee. 

Stock of raw material

At start-up stage of your business you need to have an optimum quantity of raw materials to start production. The more raw material stock you need the more working capital you should have. 

Wages

If you employ staff, you will have to pay them wages during the start-up period. You need to pay yourself for living costs as well. Based on how many staff you are going to have, you can estimate how much working capital you will need per month to pay wages.

Promotion

Starting a new business requires intensive promotion. The promotion you do requires funds, which are also part of your working capital needs. You should choose effective and affordable means of promotional tools and allocate working capital wisely. In general, while doing your SWOT analysis you should strictly look into the strengths and opportunities you have in accessing the required resources in time.  

Source of start-up capital

After knowing the estimated level of working capital you need for your new business, the next question is: Where do you get that capital from? Possible sources of finance are:

• Own savings/equity;

• Loans;

• Grants (if available).

Own savings

Equity is the owner's contribution from his/her private funds. You as an entrepreneur, should cultivate a culture of saving money for future investments. Financing institutions, such as micro finance institutions, are highly interested in your capacity to match your own funds with the loan amount that they are going to finance your new business with.

Loans

A loan is one way of financing your investment and working capital outlays. Many lending institutions require the following from you:

• A well carried out feasibility study of the business idea that the lending institution would find  viable. In this case, the feasibility study for micro and small enterprises could be a business plan. The business should, at least, tell the lending institution that the envisaged business would be profitable within reasonable period of gestation and availability of working premises;

• Some kind of collateral against loan.
   

Types of lending institutions

• Micro finance institutions;

• Commercial banks (government and private banks)

• Government credit schemes;

• Non-governmental credit schemes;

• Other special sources of funding (such as 'iqub' in the case of Ethiopia).

Micro Finance Institutions

Micro Finance Institutions (MFIs) are institutions established to provide savings and credit services mainly to the owners of micro and small enterprise engaged in wide ranges of economic activities such as construction, production (e.g. woodwork, metal work, handcraft, local food and drinks processing) and services such as hotel, transport or secretarial services.  

For further information on the lending conditions of the micro finance institutions and commercial banks in Ethiopia, please refer to the publication on "Loan conditions of Commercial Banks and Micro Finance Institutions in Ethiopia” of the same editor under documents.

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Business plan  I  Cost calculation  I  Financing  I  Legislation  I  Marketing
Supply and Infrastructure  I  Product development  I  Business management