- Posted December 10, 2012 by
Financing Your Start-up Business
Before seeking financial assistance for your business start-up, ask yourself the following:
• Do you need more capital or can you manage existing
cash flow more effectively?
• How do you define your need? 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 businesses carry risks,
and the degree of risk will affect cost and available
• 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
• 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
• 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
• How strong is your management team? Management
is the most important element assessed by money
• 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
business plan for the start-up and growth of your
Not All Money Is the Same.
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.
Most small or growth-stage businesses use limited equity financing. As with debt financing, additional equity often comes from non-professional investors such as friends, relatives, employees, customers, or industry colleagues. However, the most common source of professional equity funding comes from venture capitalists. These are institutional risk takers and may be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most specialize in one or a few closely related industries. The high-tech industry of California's Silicon Valley is a well-known example of capitalist investing.
Venture capitalists are often seen as deep-pocketed financial gurus looking for start-ups in which to invest their money, but they most often prefer three-to-five-year old companies with the potential to become major regional or national concerns and return higher-than-average profits to their shareholders. Venture capitalists may scrutinize thousands of potential investments annually, but only invest in a handful. The possibility of a public stock offering is critical to venture capitalists. Quality management, a competitive or innovative advantage, and industry growth are also major concerns.
Different venture capitalists have different approaches to management of the business in which they invest. They generally prefer to influence a business passively, but will react when a business does not perform as expected and may insist on changes in management or strategy. Relinquishing some of the decision-making and some of the potential for profits are the main disadvantages of equity financing.
There are many sources for debt financing: banks, credit unions, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. State and local governments have developed many programs in recent years to encourage the growth of small businesses in recognition of their positive effects on the economy. Family members, friends, and former associates are all potential sources, especially when capital requirements are smaller.
Traditionally, banks have been the major source of small business funding. Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and single-purpose loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms.
The SBA guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available.
In addition to equity considerations, lenders commonly require the borrower's personal guarantees in case of default. This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business. For most borrowers this is a burden, but also a necessity.
Small business is the backbone of the American economy. Government, university and private reports detail how more than 80% of the U.S. employment is by small business. History has also proven that small business has always led the cutting edge towards innovation and adaptability.
Following are important resources to check out for your small business success:
A business start-up is a major undertaking. It requires careful planning and a lot of support from family, friends, business colleagues and more. Most all businesses failures are due to inadequate funding.
I hope this information helps you with your small business dreams and endeavors.
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