Starting a small business can be a very long and drawn-out process. As a small business owner, you have to be careful if you want your company to survive and become sustainable.
It all comes down to creating a complete business plan and sticking to it. Before you can even begin to execute your plan, however, you need to know how you’re going to secure financing.
How Do You Finance a Small Business?
Money is the lifeblood of a small business. You need regular cash flow to keep a business functioning, and you can’t start that flow in a new business without a substantial transfusion of money to get it going.
You should know based on your business plan how much money you’ll need to get started. You need this funding to hire staff, buy supplies, and start up your business process, from production to sales and distribution.
Once you have the financing to start, you can move quickly to propel your company toward profit and self-sufficiency. First, however, you need to figure out how you’re going to get that financing.
Drawing on Personal Savings
Many small business owners use at least some of their own money to get a business started. There are certainly benefits to financing your enterprise. You won’t have to worry as much about outstanding debts later on, and there won’t be any other financial actors trying to influence your business decisions.
At the same time, using your own money can be risky. If you fund yourself alone, you’ll be alone again if the business fails later. Once your money is gone, it’s gone. It may be tempting to use your home or retirement savings as collateral. Still, it’s risky to leave yourself without any back-up savings for an emergency.
Seeking Individual Investors
Your optimum path to steady financing for your company may partially depend on your business entity or structure. Many businesses get started with capital investments by selling ownership or control of the company to investors willing to put their own money on the line.
These might be angel investors who like to invest in promising small businesses in an area, or they could be investors from venture capital firms looking to make a quick profit. You can give your business a strong start this way, but it might not work as well if you’re the sole owner of your business and aim to keep it that way.
Taking Out Small Business Loans
Small business loans are probably the most common method of financing new business starts. You can fund your small business without putting your savings on the line and taking a considerable risk.
The most straightforward sources of loans are traditional banks, the Small Business Administration (SBA), or smaller local lenders, including credit unions and regional banks. Each type of loan will come with its own particular requirements and conditions, so you should do your research and study the application process and payment conditions for each.
To prove your eligibility for a loan, or to get more manageable loan conditions and rates, you may need to demonstrate a certain level of annual revenue to establish that you can repay the loan. You turn in the paperwork, and then, once you’ve applied for a business loan, whether it’s an SBA loan or traditional bank loans, you have to wait to hear back.
Different financial institutions will also offer various means of repaying the loan. Some lenders can provide you with a merchant cash advance. Essentially they give you cash, and then they receive portions of each credit purchase made by your customers until the advance has been paid.
Establishing a Line of Credit
Instead of getting an entire business loan, you could also start an account for a business credit card with your local financial institution and handle simple business expenses. Loans and lines of credit tend to function in similar ways, but there are some key distinctions.
Lines of credit provide money for you to use, repay, and use again regularly. While this might not work for large initial business expenses, it can provide an easy way to manage ongoing costs while you work to establish a healthy cash flow.
Your credit score and other conditions will determine just how much credit you can get. The interest rate on a business credit card will also vary.
Other Funding Sources
There are other creative ways of finding small business financing as well! One popular method for small-scale entrepreneurs to secure funding is crowdfunding. If you have an idea people are excited about, you can ask for money from friends and family and create a crowdfunding site to raise money.
You can also offer pre-orders of a product or service you’re hoping to develop. By paying in advance for something they’re interested in, a potential customer is essentially giving you a micro-loan.
Depending on what you’re hoping to do, you may also be able to apply for a small business grant. Nonprofit companies especially may be eligible to apply for grant funding from various governmental and non-governmental organizations.
Building Your Business
All of these avenues for gathering funding depend on your ability to engage and entice people with your company’s vision. You need to sell them on your long-term goals and on your ability to achieve them.
Consider your options carefully to ensure you’re making the right choices for your company and your financial stability. Next, you’re ready to hire a professional accountant to help you do the numbers and put together your plan.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.