An overdraft facility is used to pay on during development and a loan facility is used to pay off the development once the product is in production and bringing in revenue.
For simplicity, the example below only uses an overdraft facility that funds the entire project.
From year 4 on the chart, a business loan could be taken out to pay off the overdraft at a lower interest rate. Normally some of the cost of development will be paid for from existing funds. The less you need to take out on overdraft, the less interest you need to pay on the project. The Bank will also require some evidence that the overdraft can be paid off if the project does not go well.
The general, the ball-park overdraft limit should be about twice the total development cost.
For two reasons; cost creepage from the project slipping past there due dates, and to cover the other project expenses (gearing up for manufacture and administration). If the example was orginally stated as $600,000 to develop then you can see that $1,200,000 is sufficiently large enough to fund the project.
Other Project Expenses includes administration, production and manufacturing expenses.
This project example is totally funded by the overdraft facility and is paid off over 4 years. This reason it takes 4 years to pay off is due to the sales revenue relative to the cost of producing the product and the cost of development.
Note that this is not a full-time project where staff are only working on this project.
For more information on overdrafts and business banking, please contact your bank.
For this reason it is very important to have the distribution chain set up and in place ready to receive orders and ship product from the manufacturer, as soon as production is up and running. It will cost the business more otherwise.
The product needs the distribution channels set up to get the product to the right salemen, selling in the correct locations and correctly targets the right people (the customers).
It is also important to have marketing and sales material ready for when you launch the product, and possibly sales staff training. If you pre-empt the market saying the next big thing will be on sale from a date, make sure that there is sufficently large numbers of product already distributed or you will be dealing with unhappy customers.
Get your marketing wrong and it may cost your business dearly. What kind of marketing campaign will you use to sell your product? How will the people who would like to buy your product purchase it? Where do they go to acquire it?
For more information please see a business consultant specialising in product development.
If sales is low it will cost more in interest payments as it will take longer to pay off the project.