Inspired entrepreneurs may not realize how important funding is to the success of a startup or small business venture. According to the Small Business Association, the second reason business fail is due to “inadequate or ill-timed financing.” Issues with cash flow can make it hard for a business to stay in the game long enough to take advantage of a future opportunity.
No startup owner wants to shut their doors because they failed to take into account operating expenses or the realistic costs of running a business. It is necessary for any startup to determine how much funding they will need to achieve short-term and long-term goals, how they will use the funds and what they may need to do in order to secure a loan or provide investors with an attractive return.
Understand a few of the options available for entrepreneurs and startups who need financing today.
Depending on the situation, it may be better to secure either debt financing or equity financing. Debt financing allows for individuals to cover the costs of specific needs and often comes in the form of bank loans that will need to be paid back within a certain time frame and at a given interest rate. There are debt financing options outside of bank loans, but this continues to be a funding alternative for startup owners.
On the other hand, there is equity financing. In this situation, a startup trades part of the ownership of a company in order to receive cash from investors. Risk is shared and startup owners have less to lose if a company fails and investors have more to gain if the venture is a success. Make sure that long-term goals of all major parties are in alignment when partnering with investors as they are often highly involved in the company.
Approaching Family and Friends
This may be one of the easiest ways to get money for funding. However, put a plan in place and create a legal documents to spell out the terms of an agreement to safeguard the interests of everyone involved. Formal documents and a business plan can help keep financing agreements professional and may be used when looking for other sources of financing.
Bank Loans or Private Lending
When applicants are not approved for a bank loan, they may want to investigate private lending. This alternative asks for similar information as a bank but they may be more willing to approve applicants for a higher-risk loan. In addition, such lenders generally have more knowledge about the industry.
Those looking for relatively small amounts of capital may seek out the attention of angel investors. Venture capitalists are generally looking to invest $1 million or more. Angel investors can provide an infusion of a smaller amount of capital to a startup or small business.
Plan for Growth
How much money is needed to start and maintain the startup? Can it be operated on a lean budget and what funds will be needed once it takes off? A business plan and assessment of expenditures related to operating expenses, salaries and marketing efforts can help startup owners get a better understanding of the financing they will need to open and grow their business. Some research finds that premature scaling can lead to startup death. Staying lean may be a pragmatic approach to take until significant funding is secured from lenders and there is a need to expand operations.