What You Need to Know About Financing a Small Business

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Although small businesses usually start with a dream, an idea and some serious elbow grease, what they really need to get up and running is money. This means one of the biggest hurdles to clear on the way to starting your small business is figuring out the best way to finance it. Thankfully, there are more options than ever for entrepreneurs trying to take their small business from a concept on paper to a fully functional operation.

What do you need to know about financing a small business before making a decision? Keep reading to learn more about funding options and next steps.

Calculate How Much Capital Your Business Needs

As Business News Daily reports, the typical cost to start a microbusiness is approximately $3,000. No two businesses are exactly alike, though. While you can use financial benchmarks for the “average” company to help guide your calculations, your business will ultimately have its own specific needs in terms of capital.

This means the first step is building a detailed budget for your business. The U.S. Small Business Administration advises breaking down costs into overhead (fixed) vs. variable expenses as follows:

  • Overhead expenses: Rent, utility bills, insurance premiums, administrative costs.
  • Variable expenses: Inventory, shipping, packaging, other charges pertaining to sales.

Only once you have a realistic idea of what you need can you make an informed decision on how to go about securing those funds.

Explore Your Small Business Funding Options

You’ve customized a budget based on your company’s anticipated expenses. Now it’s time to decide how you’re going to go about securing those funds.

Option 1: Bootstrapping Your Business

Bootstrapping is another way to say funding your business expenses on your own. Many entrepreneurs source money from their savings accounts or perhaps even their retirement accounts.

The advantage of bootstrapping is it alleviates owing anyone else money. Plus, you alone will get to decide how the money is spent. On the flip side, though, you will be solely responsible for the financial outcomes of your business. There are definitely risks associated with depleting your savings or investments to fund a business.

Option 2: Getting a Small Business Loan

Don’t have the money on hand to bootstrap your business? You may be able to qualify for a loan. Here are four types of loans to finance small businesses:

  • Traditional: Usually require strong credit.
  • Online: May work with lower credit borrowers, but often carry higher annual percentage rates (APR).
  • Personal: Another type of loan from traditional lenders like banks and credit unions.
  • Micro: Usually offered by non-profits or small government orgs.

As you can see, how you go about getting approved for a small business loan — and the interest rate for which you qualify — depends heavily on your credit rating. Lenders use this, along with your debt-to-income ratio, when deciding who qualifies for loans and when setting APR.

Option 3: Using investor capital

Equity financing involves a person or a venture capital firm providing an investment to help get your business off the ground. The arrangement may be that you pay back the money with interest, or that you don’t have to pay back the investment but that this entity owns a percentage of your business.

Before you pitch even a single investor seeking funds, be sure your business plan is airtight.

Option 4: Crowdfunding

Crowdfunding platforms have helped make many products and businesses a reality. This route typically involves motivating people to buy in by making your company’s journey a compelling story — and potentially offering perks, like early access to products.

There’s no one-size-fits-all approach to financing a small business. Rather, it’s a matter of making smart, personalized decisions based on your company’s needs.

 

 

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