Starting your own business can be exciting, but it can also be a risky venture that could affect your finances significantly. You need to think about what you want to do or sell, and it needs to be practical and realistic.

Figuring out how to finance your business is crucial to its longevity and viability. While there are several options available, how do you decide which is best for you?

Here are some pointers.

1. Determine the nature of your business

The first step is to ascertain what your business will entail, which in turn will allow you to select the best financing structure for it.

Find out whether your business is light or heavy in assets and investments – meaning, determine what you need to pay for in order for the startup to work at the bare minimum. For example, do you need to buy a food truck and retrofit it with kitchen accessories?

If your business is heavy on assets, large capital would be required. In this case, sourcing for external funding such as bank loans would be recommended. Self-funding would be unwise as you would likely not have enough to pay for everything you require.

If your business is light on assets you could likely get away with using your own money, although it would nevertheless not be a bad thing to look at external funding if it is available to you.

2. Evaluate your cash/assets

Evaluate how much existing cash and assets you (and your partners, if applicable) actually have to get your business running. This would allow you to determine how much debt your business can take on.

Banks will look at the amount of cash you have and decide on your capability to repay loans. This includes assets that the financial institution could consider as collateral, which could potentially increase the amount it lends to your business.

The higher the cash and assets your business has, the higher the potential bank loan. It is better to take on more debt – if you are capable of repaying – so your business can invest in more projects to generate more revenue.

Note, however, that banks tend to prefer medium to large companies in Malaysia as they have better financial strength and proven track records.

3. Project cash needed for at least two years

Generally, you should build your business for at least two years to determine if it will be successful in the long run. Hence, projecting the cash needed for at least 24 months will influence the monies required and the amount of debt your company can take on.

Depending on your assets, the business would likely need a lot of money upfront; after which, maintenance expenses usually cost less and are consistent. Some of these expenses include:

• wages and salaries of employees;
• advertising and marketing; and
• renting and leasing of equipment.

Create a spreadsheet where you write down all the expenses you envision the business would incur. This makes it easier for the bank to understand what your business plan is.

4. Determine break-even and profit points

It’s essential to consider the long-term profitability of your business. More specifically, you need to determine when you would need to break even and make a profit so your financing remains in place.

If you are making losses past a specific period, you would risk losing money in your personal capacity and the bank might claim your collateral. This period should be approximately one year, as incurring losses for longer would mean you are doing something wrong or the industry you are in is declining.

At most, the time you should allocate for your startup to make a profit should be two years – anything more, and you should consider exiting the business, especially if you are not backed by high-net-worth investors.

5. Investigate financing incentives

There are many financing options out there that offer low-interest rates. Traditionally, when you borrow a loan from the bank, it will determine an interest rate based on the risk of your business.

However, Malaysia in recent years has been placing greater emphasis on financing for small businesses to propel the economy. SME Bank, for instance, offers financing to micro-, small-, and medium-sized businesses, with programmes aimed at sectors such as tourism, tech and services, and also specifically for women entrepreneurs.

Other resources include Mara, Tekun, and CGC. You could also look into equity crowdfunding, which allows small businesses to raise funds from the public using online platforms registered with the Securities Commission.

6. Test your borrowing limit

Finally, find out how much you can borrow from banks and financial institutions. Debt is generally considered better than using your own cash (equity); the higher your borrowing limit, the more projects you can invest in.

You would need a comprehensive business plan, projected cash flow, and some form of market study to test how much you can borrow. This will also determine interest rates you are eligible for, and the terms the bank will set when providing loans to you.

This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.