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How to Finance Your Small Business
You have a great idea for a business. You’re passionate about the concept and you want to make it a reality. Yet, how do you get the money to make it happen? Acquiring business funding is one of the most important, foundational pieces of entrepreneurship. It is critical to make smart, well-considered choices to set your business up for success. Knowing exactly how much money you need, what kind of small business loans are available to you, and what lenders expect from applicants will help you score the cash you require to start and grow your business.
What are Your Business Funding Needs?
Starting a business is hard enough, but without adequate financial resources, it’s almost impossible. To ensure you have enough money to get a foothold, entrepreneurs must estimate their business funding needs before starting a company. Consider what one-time startup costs you will incur (like purchasing manufacturing equipment) as well as recurring expenses (like rent and utilities).
Do thorough research so your numbers are as exact as possible; a ballpark range will not do. When in doubt, overestimate the cost of something. The popular adage says things will cost twice as much and three times as long as you think! Keep in mind that it could take years for revenue to catch up to costs. It is prudent to raise enough money at the start to tide you over until you’re in the black.
Create a Financial Plan for Your Business
Once you have a clear picture of your expenses, it’s time to calculate your estimated revenue. Talk to similar, local businesses and others with experience in your market to approximate your potential income. Understand that your numbers will be significantly lower in the early days as word spreads about your business. Mistakes will happen and they will cost money. This is a natural part of the entrepreneurial learning process and you’ll need to budget accordingly.
While weighing your estimated expenses versus revenue is a good place to start, understanding certain aspects of your business can help you get an even more precise picture of your financial needs.
There are different types of business funding that are geared towards the needs of businesses that experience hot and cold seasons. Starting a business is inherently risky, but some types are riskier than others. Certain business financing options can help you plan for risk. It’s prudent to have an emergency financial plan in place so you don’t have to scramble for money under pressure. Market conditions can affect your ability to get good financing terms. They will also impact your company’s revenues.
All investments in your company should have an underlying purpose that helps you meet an objective. Lenders will demand to know your specific intentions for any money they give you. The length of time it will take you to pay back your lenders will have a bearing on the type of small business funding you should target, as will the investment’s usable life. You don’t want to be making payments on something you got rid of years ago. Ask yourself the following questions when creating your financial plan.
- Do you have a business plan?
- Is your business seasonal or cyclical?
- What is your financial plan to ensure you can maintain operations year round?
- What kind of risk is involved in your business?
- What is your comfort level for risk?
- What’s going on in the market?
- How is your industry performing?
- Where do you want your business to be in three to five years?
- How will your startup capital help you achieve your goals?
- Are your business funding needs long-term or short-term?
- How long will your investments last before they need to be replaced?