Today there are a wide range of options available to small business owners looking for financial assistance for their new small business.
The four principle ways to finance your new small business include personal contributions, loans, finding investors and crowdfunding. Here's an overview of each form:
One of the more traditional ways to get financing for a new small business is through business loans. Loans entail working with a financial institution, such as a bank. The most common business loans include:
Short-term loans for commercial real estate, vehicles, equipment and small outlay;
Business lines of credit for on-demand working capital, payroll funds, improved cash flow, inventory, materials and financing of accounts receivable;
Single-purpose loans for machinery and equipment.
Aside from regular financing institutions, the US Small Business Administration can help small businesses get started. The SBA network, which takes the form of regional development offices, offers a variety of loan options. The SBA’s guaranteed lending programs encourage bank - and non-bank - lenders to make long-term loans available to small firms. The Small Business Association itself also offers access to a variety of loan programs designed specifically for business owners who may have had trouble qualifying for a traditional bank loan in the past.
Crowdfunding sites like Kickstarter or IndieGogo can help new small business raise financing in any industry. Others crowdfunding sites cater to specific industries. Barnraiser and CraftFund, for example, offer funding to framing, food and beverage companies, with a paritcular focus on [craft] breweries.
Crowdfunding usually takes the form of a private donation from an individual who, in return, receives a gift from the business they donated to. Some crowdfunding sites, such as KivaZip or Accion, provide crowdsourced micro-loans rather than donations. Though crowdfunding might not be the best way to go for companies looking for more continual funding, it can be a helpful resource for businesses in need of financial assistance for one-off purchases, projects, and even marketing campaigns.
Some new small business grants are available through state and local programs while others are offered by non-profit organizations and other charity-focused groups.
This form of financing usually requires the recipient to either match the funds or combine them with another form of financing like a loan. Grants can provide a novel way to finance specific items or big-ticket equipment purchases that can make or break a business, like a brewing system for a brewery.
Equity Financing or venture capital can provide both financing and assets for a new small business in exchange for shares or stock ownership of the company. This fourth option is ideal for private companies with the potential for rapid growth, as well as businesses with a strong desire to manage investor expectations and relations.
This type of equity requires investors to take higher risks in exchange for potentially higher returns. As a result, investors are often more actively involved in monitoring the company’s portfolio, through board participation, governance and capital structure. The Small Business Investment Company Directory works with private investment funds licensed as SBICs to provide growth capital specifically to small businesses in the U.S.
Choosing from one or several of these four forms of financing might be the ticket to helping you new small business get on track. Beyond investing the time in doing some of your own research, we also recommend seeking advice from a professional accountant or CPA.
Before you pitch potential investors however, you'll first need to identify how much you'll need to get started and how that financing will help contribute to growing your new small business. That's where cash-flow projections come in.
To determine how much financing you'll need, begin by creating a lists of potential start-up costs. These will inform future cash-flow forecasts, which are crucial to each of the four methods of financing listed below.
First, start by dividing projected expenses into two categories: fixed costs, and variable costs. Fixed expenses included things like rent, utilities. insurance payment, and administrative costs. Variable expenses include pretty much any cost(s) associated with the direct sale of your product and/or the service your company offers, such as sales commissions, inventory, shipping and packaging costs, to name just a few. The most effective way to determine start-up cost(s) is to use a worksheet that lists both one-time and ongoing expenses.
Now you've established your start-up costs, you can now determine your company's cash-flow forecast. That means how much money will be coming in and going out of your new small business. A cash-flow projection helps inform where your new company's break-even point will be once both costs and cash have balanced themselves out. Cash-flow forecasts are key when seeking financing for your new small business.
If you need help getting your expenses or cash-flow projections started, many non-profit associations like SCORE can help new small businesses with their financing. They offer a wide range of assistance from mentoring services to educational resources.