Here’s Why Start-Ups Should Be Budgeting for Business Loans
Posted by : Premraj | Posted on : Thursday, June 20, 2019
DELICIOUS
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REDDITStart-up financing is pretty routine in this day and age. If you have a great idea but lack the funding to see it through, you can choose from a variety of business start up loans along with venture capital and equity financing. The thing about start-up loans, as opposed to most forms of equity investment, is that lenders do not actually require being given part ownership in the company as a precondition to lending.
This has a big impact from a practical standpoint. Where an equity investor would be repaid through a percentage of the company’s profits, business start-up loans are repaid like any other kind of loan. The business makes regularly scheduled payments until the loan is paid off. This suggests that a certain portion of the company’s budget be dedicated to debt reduction.
All of that is said to say this: start-up owners should make it a point to budget for business loans. One should never go into a borrowing scenario without having a reasonable financial plan in place to repay what is owed. A business budget is part of that plan.
A Spending Blueprint
A business budget is no different than a consumer budget inasmuch as it is a blueprint for spending. Start-up owners create budgets the same way at work as they do at home. On one side of the ledger is all of the company’s known expenses over a certain period of time – usually a year. On the other side are all of the expected streams of revenue.
Add both sides up and they should at least cancel each other out. If they do not, the revenue column should have a higher total than the expense column. It is all pretty straightforward. The tricky thing for start-ups is estimating the amount of revenue coming in. That’s often easier said than done.
A budget is essentially an estimate that relies on a combination of facts and assumptions. For the start-up, assumptions tend to carry more weight as there is little history from which to glean facts.
You can assume your new start-up will generate £100,000 during its first year, for example. Compared to other similar businesses, that number seems very realistic. But there is no guarantee until the revenues actually start coming in. Any start-up loans you take are contingent upon your estimates being correct. Get them wrong and trouble awaits.
Operating Without a Budget
Knowing that early revenues may not be as projected provides ample evidence as to why budgeting for business start-up loans is so critical. The budget provides a realistic income and outflow framework business owners can work with. By regularly reviewing the budget, they can determine whether or not they have enough revenues coming into both cover loan payments and pay the rest of the bills.
Operating without a budget leaves business owners to guess. Without a budget, no one is keeping track of how well revenue streams are keeping up with expenses. No one is paying attention to how a business’s finances are trending. That is never good.
You Can’t Afford to Not Budget
The curious thing about budgeting and business is that start-up owners really cannot afford to not budget. In the world of personal finance, it is pretty common to hear people say they don’t make enough money to establish a budget. That is not really true. Anyone and everyone can create a budget. Still, an individual can get by without a budget and still do fairly well financially. We cannot say the same thing about business.
In a business setting, you are dealing with far larger sums of money. You are also dealing with exponentially more revenue streams and expenditures. Keeping track of it all is nearly impossible without a budget in place. To operate a business without a budget is an invitation to failure.
Business loans are one of the biggest financial drains on start-ups. The new business needs that money to get things off the ground, but they also need to repay what has been borrowed. And that takes a big chunk out of revenues. Budgeting for business loans is the first step in making sure they do not drain too much from the revenue side. If business loans are too draining, a company needs to either increase its revenue streams or find a way to cut expenses.
