Financing Your Small Business
by Eran Salu, JD, MBA, CPA
If it is at all possible, you should start your business without any funding
beyond what you have available. Do this by starting slowly and in conjunction
with present employment. Start your business by working evenings and weekends
while keeping your present job as long as practicable. This way, if the business
does not meet your expectations, you have not incurred debt and will still have a job!
However, depending on the nature of the business outside funding may be
necessary. For example, expensive equipment or initial stock may be required.
When determining your financing needs, remember that nearly everyone underestimates
what is required, so be careful and do your planning accordingly.
And of course, don't forget to factor in contingency - sickness, bad weather,
equipment breakdown, etc. Anything that increases the time line to profits! Best
you figure on a year before you see a profit. Here are some items to keep in
mind when preparing your startup budget:
• Office equipment (Fax machine, computer)
• Production equipment (for manufacturing)
• Office supplies
• Legal and CPA fees
• Insurance
• Business licenses or permits
• Lease deposits
• Remodeling costs
• Utility deposits (this can be quite large!)
• Salaries
• Shipping
• Advertising and promotion
• and the big one ... contingency!
What you want to avoid is having to find additional financing during your
startup phase. It is generally easier to obtain financing the first time around!
There are two major forms of business financing.
1. Debt Financing. This simply means you get a loan from someone or somewhere
and go into debt! You are obligated to repay the money.
2. Equity Financing. This involves "selling" a portion of your company to an
outside investor. You have no obligation to repay the funds. In general, this
type of funding is provided by venture capital firms.
The fact is, 99.99 percent of all small businesses will utilize debt financing
since most "equity lenders" (venture capital companies) are interested in lending
large amounts of money, generally a million dollars or more. This article will only
consider sources for obtaining debt financing for your venture.
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