Developing a financial resource plan for your small business

“Where do I get the money to start my business?” is perhaps the most common question entrepreneurs ask. Of course, this question assumes that they know how much money they need to start their business in the first place.

Develop a plan that outlines funding sources for your small business

Where you go for funding can be different for every small business. Several factors influence the type, cost and suitability of financing for your small business, including:

  • Stage of the venture process. Are you in the start-up phase? Are you growing your small business? Is your business well-established?
  • Your small business’ achievements and financial performance to date
  • The state of the industry your business is in
  • The type of technology your business is based on (if any)
  • Potential growth of your venture
  • Number of years before an exit strategy is available for investors
  • Investors’ required rate of return on their money
  • Amount of money you need
  • What your company is worth
  • Your goals for your company
  • Investors’ terms and conditions

There are many other factors that will come into play when it comes to choosing the most appropriate sources of funding for your business.

Generally, a new small business can be funded in one of two ways: equity (ownership) or debt (loan). With equity financing, you exchange a piece of ownership of your business for the investment capital – you’re giving up part of your company to receive money to start or grow. The amount of your company you give up is negotiable, but it’s related to the size of the investment and the value of your company. If you fail, investors lose their money – you’re under no obligation to repay the investment. With debt financing, you borrow money and repay it over time to the lender. If you fail, you’re still obligated to repay the loan in full.

Money is just one factor of a successful small business

Most new entrepreneurs believe that if they have enough money, they can make any business model into a successful business. Sadly, there is nothing further from the truth. A bad idea is a bad idea is a bad idea, no matter how much money you throw at it.

The reality is sufficient start-up capital is only one element of a successful new business. Research shows that the small business owner’s reputation and depth of their social network are important to securing financial help. Not all businesses need start-up capital – but for most, the need for money comes at some point in their business’ life. So, develop a solid financial strategy, but remember that money is but one pillar of a strong small business.

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