Your Ultimate Guide to Small Business Financing
Whether we like it or not, money makes the world go round, at least when it comes to small businesses.
Thus, every aspiring SMB owner needs to solve the “money issue” if he or she wants to get the company off the ground. However, the latest small business statistics showed that 27% of small business owners could not manage to obtain the necessary funding.
So, do you think you have what it takes to succeed in the competitive world of small businesses? If the answer is yes, here are a couple of elements you might want to consider when it comes to financing your venture.
Steps You Need to Take Before Launching Your Small Business
Before you start looking for available funding sources, you will need to arrange a couple of other things as well.
After all, there is more to running a small business than just chasing financial support.
With that said, here are some of the most important steps you will need to take before you even start your small business:
Do Extensive Market Research
Market research is a necessity, not a luxury. This process will allow you to understand the conditions within the niche, as well as your target audience.
In other words, it is essential to “know your stuff” before even investing anything. So, never skip this step when launching a small business in the US.
Create a Business Plan
After learning everything there is to know about the situation in the market, you should focus on your business. More precisely, you should start with the creation of the business plan.
Every self-respecting SMB owner knows the importance of this document. Like a blueprint, your business plan should cover all the nooks and crannies of the company.
What this means is that you should put on paper all of the values, missions, goals, and targets of the business. By doing so, you will have a clear picture of the project that you plan to launch.
On top of that, a comprehensive business plan will allow you to pitch the idea to investors. Unless you want to “bootstrap” the business and start a self-funding venture, you will need help from the outside.
Estimate Startup Costs
Last but not least, you should also create an estimate of the startup costs for your business. Why?
Well, how else can you know how much money you will need to start the business? According to the small business statistics, an average capital for an SMB is $80,000 per year.
Of course, home-based franchises will require much less. Statistics reveal that a third of these businesses need up to $5,000 a year.
So, include all of the potential expenditures in this calculation. The capital expenses should be at the top of the list. Nonetheless, you should also add the cost of equipment, office space, and salaries.
Types of Small Business Financing
Believe it or not, there are more than 30.2 million small businesses and startups in the United States. Of course, the number is growing as we speak. Here are some of the methods of financing that these companies can use in the early days of their operations.
Bootstrapping
If you want to start your career as a debt-free entrepreneur, you could look at bootstrapping as an option. Moreover, 77% of small businesses decide to go with this approach.
In essence, the term bootstrapping means self-financed. Thus, you will need to reach into your savings account or some other source to provide funding for the business.
With that said, emerging entrepreneurs should always keep in mind the fact that 80% of startups fail within the first year.
So, bootstrapping can be a risky proposition. You should use it only if no other option is available.
Debt Financing
The so-called debt financing is also a standard method of financing a small business. In simple terms, you will borrow money from a bank or some other institution and pay it back later.
Of course, banks will ask for collateral in most cases. Therefore, you will need to list your assets beforehand. As a rule of thumb, small business owners decide to use their houses as collateral.
Then again, this type of financing can be hazardous as well. If you fail to catch up with the installments, lots of problems could pop up down the line.
Angel Investors
The third option on this list is one of the safest. Most people refer to it as “angel investing,” but other terms are present as well. For instance, financial experts will call it equity financing.
Either way, the trick lies in finding a venture capitalist or a creditor who is willing to invest in your small business.
Statistics on small businesses show that more than 300,000 angel investors are operating in the United States.
As a rule of thumb, you will have to present the investor with 10–15% ownership of the new company. In return, you will receive the necessary funds that will kickstart the business.
Crowdfunding
Last but not least, we will take a closer look at a modern and innovative method of financing a small business. Yes, crowdfunding is a relatively young phenomenon. The rise of the internet propelled crowdfunding to new heights.
As the name implies, the concept of crowdfunding entails donations from a multitude of people. In other words, the “crowd” will provide the “funds” for your small business.
In most cases, crowdfunding takes place online. People from all corners of the world can make pledges to support an idea.
Summary
When starting a small business, you will come face to face with many challenges. Luckily, this does not have to be the case with financing.
The methods we listed here can get you started and provide you with the necessary push. After that, your capabilities will determine if you will sink or swim.
As you can see, the number of available options is small but sufficient. So, make sure to perform an in-depth analysis of these types before you sign on the dotted line.
