WHAT YOU SHOULD KNOW ABOUT STARTUP FINANCING FOR YOUR SMALL BUSINESS
For small businesses, startup financing is hard to acquire, yet it’s necessary. Financing the business startup is a certain challenge, especially with the economic crisis as small business startup requires money when money for starting up is difficult to find. During such challenging economic times, it is hard to obtain startup financing from the traditional business financing sources, most particularly for small businesses that are considered high risk for business failure.
Nevertheless, fueled by growing unemployment concern, people are following their dreams and opening and launching a small business. If the business idea is perceived to be strong and once they have a unique service or product with good strategic plan, they might get traditional startup loans. If there’s a perception of risk, entrepreneurs have to find another alternative method to raise the startup funds.
The traditional business financing includes banks, commercial lending organizations, and government financial programs. Such organizations offer loan products, equipment leasing, asset financing, and operating line of credit. However, because of current global financial market condition, it is challenging to qualify for the startup financing and it may also be challenging to get some cash-strapped lending institutions to disperse the business startup loans, operating funds promised, and asset financing.
An alternative to the traditional financing is seeing if you can interest an investor to provide an investment in your business. Usually, investors charge high-interest rates and are in for a short-term period and they always like an exit strategy within a particular period of time. Oftentimes, investors are interested in biotech or high tech industries or some high rewarding industries.
To attract some investors, your business wants to have fast and strong growth potential, a talented management team, well-priced equity, and a compelling business plan. Typically, investors look for up to 50% equity in the business. They are also dependent on the investment amount and business proposal. You basically give up some control if you develop a relationship with an investor.
Finding a strategic partner or building a strategic alliance that enables your business to reduce its cash and startup financing needs. It also means loss of control over your business. The partnerships may end up like the marriages end in divorce. But, another alternative start-up financing is known as bootstrapping.
Bootstrapping is financing the business growth or business startup through the non-traditional methods. It’s all about raising funds without a capital for the startup. If you are planning to startup the business that has a particular investment in the capital equipment, you should consider asset financing, which will offer you a loan for equipment that you purchase to operate your business.
For the new business owners, this could mean working some jobs to raise money or revising the plan to start your business with not much amount of money or lesser services or products. Consider leasing computers, furniture, sharing administration staff, and office space. Ensure that you consider your cash flow requirements carefully and do cash flow projection for at least a 2-year period. Managing your cash flow is a way to reduce startup financing needs, manage your cash flow effectively through managing payables, receivables, short term debt, and inventory.