The contributions of small businesses to the United States economy cannot be overlooked. The oft-repeated praise of small businesses is justifiable in light of the fact that small businesses create over half of the nonfarm Gross Domestic Product (GDP). Additionally, small businesses pay 44 percent of all private payrolls and employ just over half of all private sector employees.
Obviously, the people who start and run small businesses provide enormous benefits to the country. Starting a small business can be a daunting prospect, especially for new entrepreneurs. Perhaps the most important questions facing the small business entrepreneur is financing and funds. Every venture enterprise must have capital to succeed as a start-up. Multiple options are available to small business borrowers: bootstrap financing, traditional bank loans, angel investors or venture capital, microfinancing and direct public offerings
Bootstrap Financing
Under this approach, the entrepreneur finances the business using his own money. Advantages of this method include a stronger financial position, no interest payments and more attractive prospects to equity investors. Bootstrap financing can be done through several avenues: trade credit, factoring, current customers, leasing to take advantage of extra cash and equipment suppliers. The easiest way to use current customers and equipment suppliers is to have them extend a line of credit to the business. Trade credit and factoring are more complex but viable alternatives.
Bank Loans
Honesty is the key to a successful relationship with a lender. Keeping a lender in the loop about a business’s financial health is critical. Hiding the truth invites hostility on the part of the lender and makes it more difficult for the business to secure financing. Refraining from unethical behavior seems like an obvious admonition, but too many businesses engage in it, such as hiding financial statements from the lender to avoid reporting losses. The risks of honesty include intransigence about lending additional funds, but the advantages include potential willingness to work with the business.
Angel Investors Or Venture Capital
Angel investors are high net worth individuals who invest in companies at an early stage. Angel investors take a portion of the business’s equity in exchange for their funds. Venture capital is more permanent than angel investing. Venture capitalists are in it for the long haul. They invest a great deal more money than a typical angel investor, and take a greater portion of the equity. Both options are viable for businesses in the early stage, although venture capitalists are typically far more rigorous and demanding in their assessments.
Microfinancing
This opportunity is a relatively recent phenomenon. Microfinancing works exactly like it sounds. Loan sizes range from $100 to $25,000, and the interest rates are much higher. Microfinancing firms are willing to accept other forms of collateral such as vehicles, appliances and office equipment. This avenue is perfect for entrepreneurs who cannot get traditional financing. Microfinancing is designed to get a business off the ground to the point where it qualifies for traditional financing.
Direct Public Offering
The Internet is forever changing how investing works. Companies can now go directly to the public and offer shares of stock without going through an investment firm or brokerage house. Several hurdles are hindering progress in this area: distinguishing legitimate offers from scams, wading through state regulations and convincing people to invest their money. Nevertheless, this holds great promise for financing small businesses.
There are many options to help you get ahead in your new business venture, and none should be overlooked. Get an accountant if you don’t already have one, and ensure your books are in order. Do your homework, and invest in success!