Starting a business comes with a certain amount of risk, but one of the best ways to improve your odds of business success is to understand your budgetary needs and the finance options that are available to help you start, manage, and grow your small business.
So How Much Funding Do You Really Need?
First, you'll need to determine your budgetary needs and estimate your startup costs. Since every business is unique and has different cash needs depending on how developed the business is, there isn't really a one-size-fits-all way to estimate your startup costs. Certain businesses may be able to get going on a smaller budget, while others require significant investments in inventory, equipment, and infrastructure. You'll also nee to consider costs associated with an office, retail, or building space as well as the purchase of any gear you need to get going.
To determine what you need to start, you'll need to estimate the cost of doing business for your first few months. Some expenses are ongoing, like utilities, insurance, etc., while others are one-time costs like a sign for your building or business fees. As the list grows, you'll need to identify which costs are essential and which are optional and focus on only those things that are truly necessary to start your business. The most effective way to calculate your startup costs is to evaluate both your one-time and ongoing costs.
Believe it or not, credit cards are a major source of financing for many small business owners, especially those who are just getting started. It's a popular approach, but it's critical to do your research to determine if borrowing on credit is the best approach for your business. Here are some tips to consider, courtesy of Entrepreneur.com:
- Unless your business is incorporated – so if yours is a sole proprietorship, for instance – you are guarantor of all debts. So if your sales are slow and you fall behind on payments, you risk your personal credit rating and your ability to borrow
- Rules vary by state, but your credit card issuer may still require that shareholders with significant ownership guarantee your line of credit – even if your business is incorporated
- If you're planning to bring on partners, make sure your agreement states that they will accept personal guarantees on all existing business debt. You need to address this specifically because in many states, new partners aren't automatically responsible for previous debt
Borrowing From Friends and Family
If your business requires a significant investment up front and you don't have a strong credit history (or don't want to deal with banks or private lenders), it would not be unusual to look to friends and family for startup cash when your business isn't firmly established. While this may get you quicker access to cash with fewer obstacles, you also risk potential conflict with family and friends if you have trouble repaying the loan.
Not sure of the protocol when it comes to approaching an informal investor, like a friend, mentor, or family member? Check out this blog post for six critical tips when borrowing startup funds from friends or family.
Crowdfunding is also becoming a popular way to secure startup financing. By now, you've likely heard of Kickstarter campaigns, which are one form of crowdfunding. Essentially, crowdfunding involves a collective cooperation of people who network and pool money and resources together, typically online, to support business efforts initiated by others. Typically crowdfunding gathers many smaller investments rather than a single source of funding.
In the SCORE Small Business Success podcast on crowdfunding, cofounders of crowdfunding website MsGenuity detail the process and explain two types of crowdfunding: reward-based crowdfunding, through which a person contributes money and receives some sort of reward or item in exchange, and equity-based crowdfunding, though which a person contributes to become an investor in the business.
Crowdfunding has become increasingly popular following the Jobs Act of 2012, which encourages small businesses to find alternates to traditional financing and enables entrepreneurs to raise money from the public.
Borrowing money through a formal loan is one of the most common sources of funding for a small business, but obtaining a loan isn't always easy, even if your business is established. Before you approach a lender for a loan, it's important to familiarize yourself with the factors the bank will use to evaluate your loan application.
The SBA participates in a number of loan programs that are designed for business owners who might not qualify for a traditional bank loan. To start the process, visit a bank or lending institution that participates in SBA programs and offers loans that are eligible for an SBA guarantee. Before you visit, check out the SBA Loan Application Checklist to explore the forms and documents that you and your lender will need to create a loan package to submit to SBA.
SBA is not the only option for a small business loan. State and local economic-development agencies and nonprofit organizations provide low-interest loans to small business owners may not qualify for traditional commercial loans. The good news is that most lenders you'll encounter when applying for these loans require the same kinds of information. Each loan program has specific forms you'll need to fill out, but for the most part, the types of documentation are consistent across different lenders. Check out our Business Loan Application Checklist to get an idea of what you'll need before you start the application process.
SBA also recently announced a major expansion to the recently launched online tool LINC – Leveraging Information and Networks to Access Capital – platform that matches entrepreneurs with SBA lenders.
Deciding What's Right for Your Business
Every business is unique and you'll have to decide which financing option is best for your small business by evaluating the options available to you within the context of your overall business plan. It may seem overwhelming to sift through so many options, but remember that you never have to do it on your own. Small business resources like your local Small Business Development Center, Women's Business Center, Veteran's Business Center, or the mentoring experts at SCORE can all help.