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Business

Strategies for Funding Your Business

One of the key elements in starting or growing a business is developing a comprehensive financing strategy. A long-term plan can help reinforce short-term spending discipline and reduce the likelihood your business will burn through capital too quickly.
Creating a capitalization strategy requires an understanding of the business activities your company plans to finance, estimates of how much these activities will cost, and knowledge of appropriate sources of financing.

Running the Numbers
Once you understand the business activities you need to finance, you can develop an annual budget and estimate your capital requirements for at least the next two years. Many experts recommend planning for worst-case, realistic, and best-case scenarios. This approach may decrease your likelihood of underestimating your capital requirements, which could cause you to run out of money or pass up potential opportunities. You may want to consult outside sources (such as your accountant) to ensure your budget is as reliable as possible. Your local chamber of commerce or a regional business association may help you estimate expenses such as utilities or payroll that tend to vary regionally. A professional association that represents your industry may have information about standard costs, margins, and financial ratios.

Sources of Capital
After researching your capital needs, you’re ready to consider potential sources of funding. The table below explains sources that entrepreneurs frequently use and the characteristics associated with each.

Source Advantages Disadvantages
Company profits Allows owner maximum control of business. Not feasible for start-up or early-stage company. May be inadequate to finance significant long-term expansion.
Business owner’s personal resources Owner maintains control. May require business owner to increase personal debt or jeopardize long-term goals such as a secure retirement.
Family and friends May provide flexible terms. May lack business expertise or be inadequate for long-term needs. Could potentially risk jeopardizing relationships.
Loan from bank or commercial finance company Frequent source of short-term financing. Loan officers may have broad business experience and provide assistance with financial issues. May be reluctant to provide long-term loan or to finance a start-up company. Requires collateral to secure loan agreement.
Loan guaranteed by U.S. Small Business Administration or a business development program sponsored by state government May provide capital for businesses that would not qualify for loans through other economic channels. Guaranty requirements may change in response to federal fiscal policy and current conditions.
“Angel” investor who finances small businesses Typically a former entrepreneur or executive, investor may possess considerable management expertise. May provide access to business associates and other investors. May desire active, involvement in the business, resulting in less control for the entrepreneur.
Venture capitalist Does not require additional debt, providing the business owner with financial flexibility. Often necessitates a higher rate of return than lenders because there is no requirement to make current payments.

Special Considerations for Start-Ups
If you are estimating capital needs for a start-up business, plan on maintaining sufficient funding to cover anticipated expenses for at least six months. Most start-up businesses are not profitable and typically operate six months or longer before generating capital internally. Also, the type of business you manage will influence your capital requirements. For example, a retail business requires inventory that must be financed before taking delivery. Many service businesses typically wait between 30 and 90 days before receiving payment from customers, which may require an infusion of capital to pay interim expenses.
© 2012 S&P Capital IQ Financial Communications. All rights reserved.

Starting a Home-Based Business

If you’re thinking of setting up an office in your home, there are a number of considerations you’ll want to take into account.

Zoning and Insurance
Perhaps the first issue you’ll need to address is making sure your home business meets zoning regulations and that any required licenses or permits are obtained. Many towns and homeowners associations have restrictions on home business activities. If customers will be coming to your home, you may need to comply with other requirements as well. These include parking, disability access, and display of advertising. If you rent, check your lease and consult your landlord. It’s also a good idea to tell your immediate neighbors what you plan to do so that they bring their issues to you directly rather than to the landlord or association.
You should also check your home insurance policy to make sure that “commercial” activities are covered. Most home policies do not cover claims arising out of commercial activities in a residence. If your business involves any activities that might increase the likelihood of slips or falls or damage to property, consider expanding your property loss and liability coverage.

Technology
A major factor to consider when operating a business from home is technology. The significant advances in Internet technology and home office equipment in the past 20 years have made working from home easy and realistic for a growing number of people. Yet there are several factors you should consider, including:

  • Systems support — Make sure you have somewhere to go when you have systems problems. Find a local techie you can rely on to resolve systems issues quickly and effectively.
  • Backup — A common oversight of many home businesses is systems backup. Save your work often, back up your files regularly, and make sure you have an alternative should your computer suddenly crash. Losing your files could mean losing your business.
  • Internet access — High-speed access to the Web, via cable or DSL, is a necessity for most home businesses. Check with your local phone and cable company to see what’s available in your area.
  • Upgrades — The average computer is virtually obsolete in just three years, and most of the widely used software applications come out with new versions every two years, so keeping on top of technological advances is an ongoing effort.

Tax Considerations
If you operate a business out of your home, the IRS may allow you to deduct expenses associated with your home office. For sole proprietors, this is done on Form 8829 (Expenses for Business Use of Your Home). These may include phone, internet access, and various maintenance expenses, as well as a portion of your rent or mortgage and property taxes,1 association fees, insurance, and other expenses, based on the percentage of space in your home that the office occupies.
To qualify for these deductions, there are certain requirements you must meet. The home office must be used “exclusively” for business; a guest room/office will not qualify — nor will any other shared space. Although the office doesn’t have to be a separate room, it must be a “defined separate space” used exclusively for business. To take a deduction for phone expenses, the IRS generally looks for a separate line devoted solely to the business. The same applies to cell phone and Internet service.

The key to claiming any of these deductions is to prove that they are necessary for and confined to business use. Accordingly, it’s a good idea to keep accurate records and back up your space-based deductions with photos of the office in case you are subject to an IRS audit.

Source/Disclaimer:
1Mortgage interest and property taxes are also deductible under Schedule A and cannot be deducted twice.
© 2012 S&P Capital IQ Financial Communications. All rights reserved.

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