Sufficient capital is essential for both the start-up and continuation of a business. In fact, inadequate financing is one of the major causes of business failure. In order to avoid this, you must not only have money, but you must also have the knowledge to manage it well. You also need enough money to get through the period of time before your business starts turning a profit. Ideally, you should have a twelve-month cushion to handle all your expenses with no revenue from the business.
Businesses usually are financed in one of three ways:
- Self-financed. You start with your own money.
- Debt financed. You borrow money.
- Equity financed. You take on someone who acquires a partial interest in the business in exchange for money.
If you choose to borrow money, you need to find a lender. This can be a friend, relative, acquaintance, bank, or other entity that is willing to take the risk of loaning you money.
Don’t count on the government for financing. Government grants are rare and only available for limited, specific enterprises. Most government loans are in the form of guaranteed loans through local banks.
In most cases, you need to have a well-developed and convincing business plan that contains both short- and long-term projections based on realistic figures covering at least the next two to three years. Lenders will usually require profit/loss statements, tax returns, and a current balance sheet. You will probably need some collateral to support the loan. Look at the equity in your house and/or life insurance policies, or other financial resources you may have. Be prepared to demonstrate the ability to repay and the capacity to manage funds effectively. Borrow prudently and do not overextend yourself.
There are many possible sources of capital. However, be aware that many lenders perceive small businesses as risky investments. Sources include
- Commercial banks. Get to know your banker and come in with a well-developed plan.
- Savings & loans. Check out other types of lending institutions besides banks.
- Borrowing on life insurance or home equity. You may be able to turn your equity into funds for your business.
- U.S. Small Business Administration. There are sometimes special programs sponsored by the SBA. Contact them for information.
- Section 504 Certified Development Company Program. This SBA program provides loans for acquiring land, buildings, machinery, and equipment; and for building, modernizing, renovating, or restoring existing facilities and sites.
- Local loan programs. Investigate the economic programs in your community.
- Venture capitalists. This is not an easy option for small businesses just starting out. Venture capitalists invest in high-growth industries promising huge profits.