You want to start a business, and to do that, you need money. While bootstrapping is an option, few business owners have the disposable cash to throw at such a risky endeavor. Thus, the majority of businesses begin through diligent financing. If you have experience financing a car or obtaining a mortgage on your home, you know that financing isn’t simple. Here are a few facts about business financing that you need to know before you launch your big small-business dreams.
1. You Don’t Need to Be Rich to Start a Small Business
Just because your business doesn’t start out with four locations and an ad spot during the Super Bowl doesn’t mean it is destined to fail. Plenty of the biggest brands today started with almost no funding — think Microsoft, Ben & Jerry’s, and Disney. While having substantial personal assets is useful, it is by no means vital to business success. For that, you primarily need knowledge, determination, and a bit of luck.
2. You Will Always Contribute Financially to Your Business
That’s not to say that you don’t need any personal wealth to start your business. In fact, the most beneficial small-business funding — i.e., loans and grants coming from government agencies — often require collateral or applicant contribution, which is a set percentage of the funding sought. Even if you finance your business another way, you will likely spend your own cash to boost your business. For example, you might buy office supplies with your personal credit card or use your garage as your home office. You should be willing and able to make these sacrifices.
3. You and Your Business Are Essentially the Same
Experienced entrepreneurs have a history of success (or failure) which lenders and investors will use to gauge a new venture’s viability. Conversely, as a new entrepreneur, you only have your personal financial history to point to when seeking small-business financing. Even if you register your business as a corporation and divorce your personal liability completely from your company, from a financial standpoint, you and your business will be the same for years to come.
4. Banks and Credit Unions Are the Main Sources of SMB Funding
After your own pockets, your most likely choice of funding is from a bank or credit union. This is because these institutions are convenient and seemingly reliable. However, just because banks and credit unions are popular choices doesn’t mean they are right for your business plan. You might instead consider alternative options, like online lenders. If you are interested in these avenues of financing, here are helpful resources to help you make an informed decision.
5. Funders Don’t Fund Unless They Benefit
Anyone parting with money wants to know what’s in it for them — and those providing your business with much-needed cash are no different. In the case of lenders, the benefit is obvious: a percentage rate of return. For investors, the benefit is slightly murkier; likely, you will need to use overt language in your business plan to convince potential investors of the advantages of funding your business over others.
6. You Absolutely Need a Business Plan to Receive Funding
It doesn’t matter whether you are bootstrapping all your funding (which, by the way, is inadvisable) or you are financing through the SBA, a local credit union, or friends and family — you still need a business plan. A business plan is more than a document convincing others to give you money; it is a roadmap to guide your business to its goals. If you don’t know where to start when generating your business plan, you can find all sorts of helpful tips and tricks here.
7. How Much You Get Depends on Your Business’ Size and Age
Unfortunately, the newer your business — and the newer you are to small-business ownership — the less money you are likely to receive. Most finance options seriously weigh the size and age of your business when deciding how much to supply and what rates to offer. Fortunately, as your business ages and grows, you will receive better and better financial opportunities. As long as you can endure the first few years on dimes and pocket lint, you should have access to excellent funding eventually.
8. Women and Minorities Can Catch a Break
An overwhelming majority of businesses are run by white men, and everyone except for white men wants that to change. As a result, there are several programs that make it easier for female and minority entrepreneurs to acquire funding. For example, the SBA offers the 8(a) Business Development program that targets socially and economically disadvantaged groups with counseling, training, guidance, and contracting opportunities. Other federal and state agencies offer exclusive grants to women-owned or otherwise underprivileged businesses.