Whatever source of finance you select, there are steps you should take, and questions you should ask yourself, to ensure that your investors have made a sound decision in supporting you and your idea.

How much do you need?

It's no good just saying “I need $50,000”. A bank will want to know why you need it, and you'll need to do more to convince them than simply explaining your excellent business idea. They will assess your strengths, weaknesses and past commercial experience and will need to be confident that you have the skills and ability to ensure the success of the business.

To achieve this you will need to present a strong business plan that contains a sound financial forecast. Those two words can seem very intimidating for a small business owner, however, understanding the financial situation of your business is very important, both for you and your financial lender.

What will you do with the money?

You've done your financial forecast and worked out how much money you need, the next question your lender will want answered is what you plan to do with the money? The answer to this question can be found in the operational strategy of your business plan

The more comprehensive your business plan, the more likely you are to succeed in securing finance for your business.

When will you repay it?

Your lender will also want to know when you plan to pay back the money they've invested in your business. To answer this question see the cash flow forecast in your business plan. Your cash flow forecast estimates the amount and timing of cash flowing in and out of the business, and calculates the anticipated bank balance at the end of each period.

How will you repay it?

You've worked out how much money you will need, what you plan to spend it on, and when you will be repaying it. The next pressing question your lender will want answered is ‘How do you plan to repay it? The answer to this question can be found in your financial forecast. The financier will need to know the expected level of activity (sales) for the next twelve months.

A financier will also want to know what sales must be made before the business is making a profit. You will need to know your breakeven point, that is, where the income of the business exactly equals the cost of operating the business.

What will you offer as security?

You've prepared a thorough business plan and included comprehensive financial forecasts, but your lender now wants security. What assets can you offer as security against the business loan?

Decide what personal and business assets, such as equipment, land and buildings can be used as collateral for a loan. Then, get professional advice from an accountant on the terms of the loan and the security requirements of the lender.

What's next…

• Work on your business plan 
• Is your business eligible for government assistance or a grant? 

Raising finance from family and friends can be rewarding for both parties: you get the finance to start or expand your business, while your family and friends have the satisfaction of helping you while earning interest on their spare cash.

Family and friends may accept more flexible terms and conditions that are better suited to your business than those offered by commercial banks.

Often arrangements with family and friends are informal and based purely on trust and verbal assurances. However, a formal written agreement is strongly advised in order to minimise disputes in the future. Preserving your relationships with friends and family is as important as pursuing your business opportunity.

Be aware of the tax implications of interest on loans from family or friends. The lender has to declare the interest received as taxable income, and you can deduct the interest as a legitimate business expense. If the loan has no interest then there are no tax implications for either party.

There are four key steps to follow when obtaining a business loan from family and friends:

Sell your vision

Practice a one-line pitch that clearly communicates the vision for your business. Tell them why the business idea will work, and what you will do to make it work. Tell them your back-up plan to pay them back if the business doesn't work.

Ensure it is a loan, not an investment

Make it clear that the money you are asking for is a loan and that you will pay it back. It is not an equity investment. Family and friends are entitled to get back what they loaned you, with interest, and a performance bonus if you achieve a specified level of financial success. However, a loan does not mean they have bought equity in your business.

Have a repayment plan

Prepare a realistic repayment plan that is based on the financial forecasts developed for your business plan. Document the plan and include a reasonable and easy-to-understand interest rate.

Formal loan agreement

Once you have agreed on a repayment plan, you should draft a formal loan agreement to protect both parties. A formal agreement, or contract , ensures that everyone understands this is a business arrangement.

Your agreement should include, but not necessarily be limited to, the following issues:

• term of the loan, payment amount, and repayment schedule;
• interest rate, and whether it is calculated and compounded every day, week, month, quarter or year;
• the process for managing late or missed payments, including penalties;
• how and when the loan will be paid if the business fails; and
• any special payment arrangements, such as no payments for the first year, interest-only payments, seasonal payments, or bonus payments.

It is strongly that recommended you seek professional advice before entering into any contract.

What's next…

• Work on your business plan
• Is your business eligible for government assistance or a grant?

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