Millions of Americans regularly yield to an inner calling and decide to go into business for themselves. Millions of others put off the decision repeatedly, many for the same reason.
The decision to take the leap to becoming a business owner often hinges on one critical element: finding sufficient amounts of capital. It takes money to go out on your own and to survive long enough to succeed.
The Need for Capital
For a startup or growing small business, there are several ways to bring cash into a company for operating capital and expenses.
One way is to seek out equity investors. For many people, the idea of bringing in outside shareholders is not viewed favorably. The very idea of being on your own makes it difficult to share ownership with others. Another idea is asset based loans, which means you can use an asset as collateral for a loan. They can be fairly reasonable to obtain if your company is in good financial standing.
Additionally, for small businesses, there are very stringent laws and regulations that deal with selling equity in a company. It can be a burdensome and expensive process.
Sources of Debt
The second, and by far most common, method of financing equipment and obtaining the necessary capital is through various forms of debt.
Many successful small businesses grow from the use of a big dose of credit card debt taken on by the business owner. Others have used loans from friends and family.
Traditional bank loans for startups are not common in today’s economic environment. The exception to this is when the entrepreneur’s own credit standing will support a loan that can be used for the business.
It can take years for a small business to build the financial base that will allow loans on its own balance sheet and earnings.
Many small businesses find ways to get loans from non-banking sources that focus on small businesses. These loans range from SBA-guaranteed lending to bridge loans and asset-based loans for financing equipment.
When lending on an asset, the source is counting on the value of a piece of equipment or real estate, not the credit of the company alone.
In some cases, there are lenders that will finance inventories. There are also companies, called factors, that will provide funds against the invoices a small company generates with its customers.
For any small business owner, the issue of capital and financing is a daily priority. Growth consumes cash and makes it necessary to continually find and secure additional working capital.
Even profitable companies often find that profits are simply not enough to meet all the normal cash requirements.
Having adequate capital is a necessary trait of a successful small business.