Financing a Small Business
Financing startup businesses can be challenging. For entrepreneurs eager to learn how to obtain business financing, we offer a primer on questions you need to ask and choices you'll need to make.
Want to find business investors? Ready to raise money for your startup? Thinking about getting a small business loan?
While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second.
Whether you're starting a business or expanding one, sufficient ready capital is essential. Making the wrong financing decisions can be painful. It's important to avoid common entrepreneurial financing mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.
Before pursuing a financing round for your startup, ask yourself the following:
- Do you need more capital or can you manage existing cash flow more effectively?
- How do you define your need for capital? Do you need money to expand or as a cushion against risk?
- How urgent is your need? You can obtain the best terms when you anticipate your needs rather than looking for money under pressure.
- How great are your risks? All businessess carry risks, and the degree of risk will affect cost and available financing alternatives.
- In what state of development is the business? Needs are most critical during transitional stages.
- For what purposes will the capital be used? Any lender will require that capital be requested for very specific needs.
- What is the state of your industry? Depressed, stable, or growth conditions require different approaches to money needs and sources. Businesses that prosper while others are in decline will often receive better funding terms.
- Is your business seasonal or cyclical? Seasonal needs for financing generally are short term. Loans advanced for cyclical industries such as construction are designed to support a business through depressed periods.
- How strong is your management team? Management is the most important element assessed by money sources.
- Perhaps most importantly, how does your need for financing mesh with your business plan? If you don't have a business plan, make writing one your first priority. All capital sources will want to see your for the start-up and growth of your business.
Not All Money Is the Same
Remember, there are two types of financing: equity and debt financing. When looking for money, you must consider your company's debt-to-equity ratio - the relation between dollars you've borrowed and dollars you've invested in your business. The more money owners have invested in their business, the easier it is to attract financing.
If your firm has a high ratio of equity to debt, you should probably seek debt financing. However, if your company has a high proportion of debt to equity, experts advise that you should increase your ownership capital (equity investment) for additional funds. That way you won't be over-leveraged to the point of jeopardizing your company's survival.
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