Startup financing for small business is necessary and hard to acquire. Financing the startup of a business is a particular challenge during tough economic times, as small business startups need money when money for starting up is hard to find. During these challenging economic times, it is difficult to obtain startup financing from traditional business financing sources; particularly for small businesses, which are considered a high risk for business failure.
However, fueled by a growing unemployment issue (caused by shrinking businesses and lay-offs), individuals are following their dreams and opening a small business. If their business idea is perceived to be very strong and if they have a unique product or service with a good strategic plan, they might be able to get traditional business start up loans. If there is a perception of risk, those entrepreneurs need to find an alternative method of raising startup funds.
Traditional business financing includes commercial lending organizations, banks and government financial programs. These organizations provide loan products, operating lines of credit, equipment leasing and asset financing, and more. But, due to current global financial market conditions, it can be challenging to qualify for this startup financing (lending criteria has tightened as most traditional lending institutions want a high level of security and low risk) and it can also be challenging to get cash-strapped lending institutions to disperse business start up loans, asset financing, or operating funds promised.
One alternative to traditional financing is to see if you can interest an Angel investor in providing an investment in your business. Angel investors typically charge higher interest rates and are in for a short term period; they want an exit strategy within a specified period of time (therefore they will want their money back, with interest, quickly). Angel investors are often interested in the high tech or biotech industries; or other high reward (and also high risk) industries. To attract Angel investors, your business needs to have strong and fast growth potential, a talented management team, a compelling business plan, and well priced equity. Angel investors usually look for up to 50 percent equity in the business; this is really dependent on the business proposal and the investment amount. You typically give up some control when you develop a relationship with an angel investor.
Another alternative is to find a strategic partner or to build a strategic alliance that allows your business to reduce its cash and/or startup financing needs. This also means a loss of control over the business; and partnerships can end up like marriages, in divorce. Yet another alternative startup financing is bootstrapping. Bootstrapping is financing a business startup or business growth through non-traditional methods. Bootstrapping is about raising funds (for example, to start a new business), without startup capital. If you plan to startup a business that has a significant investment in capital equipment, consider asset financing. Asset financing will provide a loan for equipment that you buy to operate your business.
For new business owners, that might mean working several jobs to raise cash. Or revising your plan to start your business with less money, or fewer products or services. Consider leasing furniture, computers, sharing office space and administration staff. Make sure you carefully consider your cash flow needs and do a cash flow projection for at least a two-year period. Cash flow management is a way of reducing startup financing needs; effectively manage your cash flow by managing receivables, payables, inventory, and short term debt (in other words, increase incoming cash and reduce outgoing cash).
Some other non-traditional business financing methods might include:
- use of credit cards;
- second mortgages on the entrepreneur’s home;
- equity loans, secured by personal assets; loans from key suppliers;
- partial pre-payments or progress payments from large customers;
- and/or loans from family, friends and associates.
For small business owners, obtaining the financing to startup your business or to keep it operating is usually a challenging experience. Before you borrow the money you need for startup, ensure that your business can support that level of debt and can repay on the lender’s debt schedule. You need to have a strong business plan and be able to present a strong business case to your lenders.
Financial lenders will assess your knowledge, your capability, and your business proposal. You will likely have to put up personal guarantees for the money you need; this means you have to have assets to back up your guarantees. Unfortunately, not all prospective business owners have the credit rating to qualify with their lending institutions. Business financing and business start up loans are serious endeavors. You will owe a lot of money and if your business doesn’t succeed, your money and your lenders’ or investors’ money will be gone.