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The Practical Problems of Business Start-up FINANCE Business start-ups find difficulty in raising finance. WHY? Q: How can individuals avoid the high interest charges lenders give to them? Q: New businesses have set-up costs. What are these? Once a business is up and running it will also need adequate finance in order to meet day-to-day costs (this is known as working capital). Careful planning of cashflow is vital, especially when the business is in its early stages. CASHFLOW This is the money coming in and going out of the business. Q: Why does more money tend to go out of the business in the early stages of its life? Research suggests 70% of business failure is due to poor cashflow management (even if the firm is potentially profitable). Firms must ensure they have adequate working capital to meet day-to-day needs. Banks provide 60% of the external finance for small business start-ups. The bank wishes to see, in most cases, a substantial amount of the entrepreneurs money in the venture (ensuring the entrepreneur is committed!) and also some form of security e.g. the borrower’s house. Q: The two main forms of bank lending are….? To overcome the reluctance of banks to lend to small business, the government has a ‘Loan Guarantee Scheme’ (if the business fails, 80% of loans will be covered by the government). Q: Why does the government do this? Two other sources of finance for start-ups are: Venture capital ‘Business Angels’ (see Marcouse pg531) BUILDING A CUSTOMER BASE This involves getting people to initially use your product/service, and making sure they use you again in the future; and tell others about you! The key features to customer loyalty are: Provide a good basic service Develop an after sales service Find out about your customer base Ensure a positive contact between staff and customers THE LOCATION DECISION This decision is fundamentally about costs and sales. There is rarely a perfect location, usually businesses have to weigh up all the options and decide on the one that they judge to be optimal. One must balance one factor against another e.g. should a very low cost site be accepted as opposed to a more expensive site which is in a better position with respect to the market. Factors affecting a location decision: 1. Material orientation (bulk loss) 2. Market orientation (bulk gain) 3. Transport firms aim to minimise the cost of transport in terms of money and time. Involves customers and staff as well as suppliers and distributors. This explains why despite government aid attempting to attract firms to Cornwall, West Wales etc. remains difficult. 4. Rent and rates preferred locations carry higher costs e.g. industrial rent per square foot is approx. £12 in London, £10 in South East England and £2.50 in Mid Wales (1995 figures). 5. Labour both in terms of numbers and skills. Local education, regional wage rates and industrial relations all play an important part 6. Infrastructure: this includes gas, electric, water, waste, communication links, legal and financial services etc. All these vary in availability and cost. E.g. manufacturing and distribution services may prefer to be out of town due to transport links and land. 7. Concentration and inertia: e.g. Silicon Valley in Detroit. Allied industries develop in the area such as specialist transport/ training/ suppliers etc. 8. Government policy 9. Management Factors: relocation involves a number of costs in terms of general upheaval, interruption to production, customer inconvenience, time etc. 10. The Environment: This includes culture, leisure and education. Problems: The North-South divide still exists. WHY?
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