One key concern for anyone starting a business is how to finance the start-up. The small and the medium-sized enterprises (SME) proprietors often assume all the responsibilities from business processes, management of cash flows, sales, and marketing to human resources management.
Most SME entrepreneurs face numerous market challenges, and between 70 – 80 percent of the start-ups not enduring through the first year of operations and only 9 percent of them then manage to hit the 10-year mark according to Gary Epstein, the managing director at EasyBiz QuickBooks. A primary reason behind this high rate of failure is lack of sufficient funding.
If you’re an SME business owner and have managed to get the required funds to start and run your business, it is essential to prioritize proper management of the finances of your business from then on. Financial security is necessary for all SMEs to be able to stay ahead of the business competition and improve their business operations, profitability, and personnel,” Epstein said.
There are many best alternatives in seeding entrepreneurship or sources of business finance (Garry, Khavul, Siegel, & Wright, 2015).
Before we look at the 11 different options, let’s look at the best five financial advice for start-ups and SMEs to achieve financial stability, according to Epstein.
- Be 100 percent sure that you have the financial muscle to set up the business.
Every business is bound to encounter challenges and emergency expenses in its initial few months. It is thus essential for the proprietor behind the company to estimate well the total startup capital they need.
- Spend cash wisely and save a few dollars wherever possible
Be frugal, cut your expenditures and spend only on the basic requirements such as business cards, signage, and rent in the initial few months until you make enough cash to cater for other things. SMEs should also continuously put extra cash aside for financial emergencies.
- Focus on your day-to-day flow of cash
Regardless of the size of your business, always know your finances. You must understand the whole picture, but also consider the fact that your start-up financial health begins with the daily cash flow. If you don’t keep records of your daily expenditures, it can increase rapidly, and you’ll get into struggles before you realize it,” Epstein said. He also suggests that either approach a professional accountant or invest in online solutions that help simplify tracking of the business income and expenditures if you are struggling with managing the business cashflows.
- Make use of technology
SMEs should also consider the use of digital tools that are available to them since the use of latest technology offers companies a competitive advantage and the organization that uses digital solutions has a competitive edge over those that don’t.
- Make a plan for your tax and regulatory requirements
Always keep your books orderly always and avoid procrastination. You can easily endure through the tax season and also to properly manage your daily financial tasks. It enables you to understand whether your company is headed the right way, whether you have a realistic budget and the portion of the company that is performing well.
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What Are the 11 Top Easiest Ways to Finance a Business Start-up?
If you diversify your sources of financing, it can allow your start-up to wade the potential economic downturns better, and it will also improve your chances of getting the appropriate financing to meet your specific needs.
Besides, most bankers don’t like to be the sole source of finance and showing that you’ve explored or used various other financing alternatives demonstrates to lenders that you’re a proactive entrepreneur. Every source of financing has its specific pros and cons as well as criteria they will use to evaluate your business eligibility.
Financing a business start-up is a daunting task. Here we’ve compiled top 11 ways to help raise finance for your business start-up:
Crowdfunding is a great and effective way of raising money with a fairly low cost and a creative project. It usually involves coming up with a goal that shows how much cash you will need to accumulate over a given period. Your family, friends and anyone else then use a specific site like Kickstarter to pledge cash. It helps facilitate the requesting for and also rendering assistance for single and one-time projects. Usually, the project-creators provide enticements for promising.
Pledge Some Amount of Your Expected Future Earnings
Another strategy to raise money is to pledge some of your expected future earnings. There are online marketplaces where you can offer a certain percentage of the business future lifetime revenues to acquire an upfront or an unassigned venture funding.
Attract Angel Investors
Angel investors are typically wealthy persons or even retired corporate executives who will directly invest in small and medium firms owned and managed by others. They are usually leaders from various fields who contribute not only their own experience and connections, but they also offer their technical knowledge and management expertise. These Angel investors mostly tend to sponsor the business with finances in its initial stages.
The investors will, in turn, need to supervise the operations of your business which will act as their guarantee for the risk they have taken input money in your business. They will usually appear as directors in the board to ensure transparency. Since they also keep a very low profile, to get to them, you require assistance from specialized associations and search certain websites to see them.
Pitch any angel investor, and apply some of these tips to win them over:
- Ensure you have experience or experiences adviser in the business. Having extensive experience can help reduce the investors’ uncertainties about your business capability of dealing with an unstable economy. Even if you have an unpaid expert or adviser, this could add to the investors’ faith in you.
- Ensure that you are starting a venture because of the passion you have towards it and not because of what you want to gain from it. It is a significant aspect since the investors will always spot the motive.
- You’ll need to create competitive analysis, market assessment, and firm marketing and also sales strategy if you want to win an angel investor. Even start-ups need to show a high level of market knowledge in the areas they want to enter in addition to maintaining a high discipline level to stick to their plans and get them accomplished.
- Keep them informed. Keeping the investors informed shows that you are serious and that you keep track of everything that is happening in the business. By doing this, you create a favorable atmosphere for the investors to trust you and your plans.
Securing an SBA Funding
With banks being reluctant to give start-up loans, you can apply for an SBA loan guaranteed by the U.S. SBA. Some of the SBA-guaranteed loans qualifications include:
- The SBA helps businesses that cannot acquire loans for business start-up individually. If you are turned down by a bank, then you can apply for the SBA loans.is not legally allowed to secure loans to businesses that can obtain the money they need on their own.
- Your business should fall into the category of the government’s small business definition in the industry you want to operate.
The SBA doesn’t provide loans directly. Therefore, after meeting the qualifications, an individual should then apply for the loan from the financial institution that offers the SBA loans.
Raising Money from Family and also Friends
Another ideal source of finance for any start-up is your family and also friends. However, you’ll be endangering their future finances and even jeopardizing critical personal relationships when you turn to your loved ones for money.
Don’t make the mistake of approaching your friends and family when you haven’t formulated a proper business plan. Be sure to supply accurate financial estimates and also evidence of your research and assessment when required. It should reduce the possibility of nasty surprises and should also let your investors see how seriously you take their finances. Also, provide a healthy business plan, but remember not to be overconfident and let them know that there is also a chance of things not going your way.
Tap into Your 401(k)
There is a provision found in the tax code that allows you to tap into the 401(k) without incurring a penalty if you follow the right steps. The steps are simple enough but legally complicated, so you’ll require having someone with experience of setting up a corporation and the appropriate retirement plan to roll your retirement assets. You’ll be investing your retirement funds, which means if things don’t work out, not only do you lose your business, but your investments, too.
Acquire a Microloan
You can consider getting small funding from microlenders even though the lenders charge higher interests that the usual banks due to lack of security, The lenders usually don’t ask for so many qualifications and collaterals and you can get yourself $500 and even higher amounts like $35,000. The loans normally require less paperwork and time spent applying is less.
“Microloans are ideal for a startup especially if you need capital to purchase new pieces of equipment or cash to service a deal,” said Connie Evans, the CEO, and president of AEO.
The first investment should come from you. You can either use your cash or loan secured by your possessions. It confirms to your investors and lenders that you’re committed in the long-term project and also that you’re set to start the business and to take risks.
Venture capital is fundamentally not for all kinds of entrepreneurs since the financiers of venture capital usually target the technology companies and start-ups with high potential for growth in sectors like information technology, biotechnology, and communications.
Venture capitalists assume an equity holding in the start-up. It assists the start-up to perform a highly promising but risky project. The start-up thus gives up some stake or equity of their business to another external party.
The financiers of venture capital also expect to get a good return on the investment, which comes from the start-up when they offer shares to the public. Make sure that you incorporate investors who have extensive experience and know how to invest in your business.
Business incubators who are also called business accelerator main focus is for high-tech companies. They provide support to the upcoming companies in various phases of business development. The economic development incubation locally mainly focus on job revitalization, the creation of jobs, hosting and sharing services.
Incubators usually attract new businesses with a future focus and other fledgling firms to share with them their premises, as well as offer their administrative, technical and logistical resources.
The incubation stage usually lasts up to 2 years, and once the product is set, it leaves the incubator’s properties to start its industrial production chapter on its own.
Government Subsidies and Grants
Government organizations offer to finance new companies through grants and subsidies. Acquiring a government grant can be a daunting task because of the intense competition. The qualifications for getting a grant award are also often very stringent. A majority of donations require the entrepreneur to match the money they are advanced, and this amount can vary significantly, based on the source. For example, the grant for research may require the entrepreneur to fund only 30% of the overall cost.
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