Small businesses are the backbone of the American economy. It is a way to grow and nurture assets. These can generate more than capital for an investor. Small businesses need funds and proper management. money from the wrong source can cost your company. When it comes to financing and its effect on your business, less is more.
Small businesses generate about 50 percent of the U. S gross domestic product (GDP). Founders of small businesses also contribute to growth and vitality. They contribute in specific areas of economic and socio-economic development.
The Basics of Business Finance
For small businesses, finding the right funding model is vitally important. You will probably need access to capital through business financing. There are a number of ways to find financing for a small business.
- Debt financing: Debt financing comes from a bank or some other lending institution. It is similar to taking out a mortgage or an automobile loan. Regular monthly payments are required until the debt is paid off. The interest you pay on debt financing is tax-deductible.
- Equity Financing: Here either a firm or an individual makes an investment. Meaning you don’t have to pay the money back. In this case, the investor now owns a percentage of your business. The investors are called “venture capitalists” or “angel investors”. There is often more liquid cash on hand for operating expenses.
- Mezzanine Capital: Mezzanine capital often combines the best features of equity and debt financing. The lender has an option to convert unpaid debt. They convert the unpaid debt into the ownership of the company. Mezzanine capital is often provided very quickly with little due diligence.
Structure of Investment Deals
Structuring the deal is a key step in completing a round of financing. There are a number of ways an investment can be structured. But here are the most common ones:
- Convertible Notes: It is a form of debt that converts to equity after a round of financing. Here valuation is delayed until a later financing round. Convertible notes are generally short documents that are easy to structure.
- SAFE’s: SAFE (Simple Agreement for Future Equity). It is another mechanism to seek initial funding without setting a valuation. Investors receive future shares when liquidation occurs. It also provides rights to investors for future equity.
- Priced Rounds: In this case, an agreement occurs between the investor and founder. The investor receives equity determined by a valuation. The valuation amount is agreed upon by both parties.
Financing Options for a Startup
Unless you are independently wealthy you need financing options. Working out your financing option is not something trivial. You need to do thorough research. Here are some ways that can help you:
- Self Financing: People don’t usually trust enough to lend loans to entrepreneurs. If you have savings of your own it’s an advantage. Try exploring these options if you’re comfortable with bad consequences.
- Micro-Loans: Microloans are very popular in small and developing nations. They are reserved largely for np organizations. They are granted to individuals who don’t qualify for bank loans.
- Venture Capitalist: Venture capitalists have money to invest. They want to invest in upcoming businesses. In return, they want some kind of control over the business. VCs are looking to make money on their investments.
- Contests: Eligibility requirements, entry fees, and judging criteria vary widely. But if you have confidence this can be it. These betting sites in the Philippines have helped to gain funds.
- Friend and Family Loans: Your friends and family have a personal interest in your success. This might make them more willing to invest in your business. Taking money from them, however, can be tricky. pros and cons should be scrutinized before deciding to use this method.
Tips to Manage Small Business Finances
Managing finances can be a challenge for any small business owner. If you don’t have a lot of experience then it becomes difficult. The most important step is to educate yourself. Here are a few tips to stay on top of your finances.
- Keep Good Business Credit: As your company grows you may need more loans. With poor business credit getting approval for transactions becomes difficult. Don’t take out loans with interest rates that you can’t afford. Only seek funding that you can quickly and easily repay.
- Having a Good Billing Strategy: Every business owner has a client that is consistently late on its invoices. Managing small businesses means also managing cash flow. If you’re struggling with late payments, build new strategies.
- Monitor Your Books: This is an obvious practice, but a very important one. Try to set aside time each month to monitor your books. It will allow you to become familiar with your finances. It will also provide you with a window into potential financial crime.
- Spread You Tax Payments: You might be having trouble with quarterly estimated tax payments. You can change it to a monthly payment instead. In this way, it becomes easier for you. You can treat your tax payments as other monthly expenses.
- Pay Yourself: Small business owners often forget their own contributions. You should never overlook yourself. Compensate yourself in the best possible way. You want to ensure that your business and personal finances are in good shape.
- Invest in Loans: Set aside money and look into growth opportunities. This will help your business to thrive. You may face substantial challenges but keep trying. You can also use loan proceeds to boost your cash flow.
- Plan Ahead: Where do you see your business in 10 years. Star planning now. when it comes to your finances you need to plan for the future.
Every year, thousands of people start companies. Their business ideas may be different. But they have one thing in common, that’s finance. Funding and managing finances are the base of any small business venture.
One wrong step can destroy your years of planning and hardwork. This short guide addresses the most common ways to manage and finance your business. Professional guidance is advised before taking any decision. Happy Venturing!!