Small businesses are the economic backbone of any society. They represent about 90% of all businesses, comprise around 50% of employment worldwide and generate 7 out of every 10 jobs. Despite these impressive numbers, 30% are expected to fail within their first two years, and less than half of them survive five years or longer.
A small business is typically defined as a company with less than 500 people, but it is micro, small businesses that are the most common kind, and they’re defined as companies with 10 or less employees.
Why small businesses can fail
While poor management, infrastructure issues and marketing mishaps are some of the most common reasons for failure, the number one reason is financial due to a lack of capital.
There’s a lot that goes into planning a small business and having enough capital to see you through must be at the top of the list. You’ll be responsible for such things as: keeping operations running on a day-to-day basis, including funding, payroll, paying fixed and varied expenses such as rent and utilities, and ensuring outside vendors are paid on time.
When what you’re generating isn’t enough, you’re quickly put at risk for the business to collapse. The inability to manage the balance between your expected income and your expenses is the point at which many entrepreneurs fail at.
Financial options
The financial options to start a business are quite a few, and it’s a matter of identifying which one suits you and your needs. Have a look now at some of the most popular and safest options.
Self-Financing
Tapping into your own money is often the first option, considering that the average cost to start a small business is around $3000, and home-based businesses even less, starting at $2000 reaching around $5000.
It’s estimated that you will start by needing at least six months of fixed costs at hand. This shows you, however, that you should start small and not let your optimism blind you. Investing your money in a small business is a tight-rope walk, where you need to work in order to succeed, but don’t assume or take it at face value that you will succeed.
You want to be aware of the costs of the big picture, without overlooking all the small costs that add up. It’s all too easy to overestimate your revenues and underestimate your costs.
You also have to learn to differentiate between ongoing and one-time payments, essential cost vs options, and fixed vs variable costs; fixed being those costs which are stable every month, while variable costs are those which depend on the actual sale of the product or service you offer.
Small business loan
If you strike out on the first option then you can consider getting a loan. But not all loans are created equal, and a bank loan is usually discouraged because the payback method of bank loans will typically have a very high interest, and adds a load of stress to the already stressful situation of being a business owner. Yet there are sites that have a lot of experience in small business lending and provide you with a platform that will hook you up with a lender. It’s a great way to find angel investors. Using a lending platform is simple and consists of three main steps.
- Enter the information about you and your business.
- View lenders and see if they match up to what your business is looking for and compare the business loans online.
- Connect to a lender or more than one and wait for their reply.
These platforms guarantee to put you in a position where you can find lenders. But it’s up to you to do the convincing.
Angel investor
There are wealthy people who like to invest in new businesses and startups that they believe have the potential of going somewhere, in exchange for a stake in the business.
In many cases, an angel investor is someone who has done very well in a certain industry and is looking for other opportunities within the same industry. They can provide you with both the finances as well as guide you with great advice, because they have experience dealing with the industry.
Sometimes, however, many angel investors tend to keep a low profile, and it’s not that easy to know who or where they are, but there are networks and organizations that can put you in contact with these types of investors, as mentioned above. Remember, when you do get a chance to meet up with or chat with an angel investor, make your case clear, compelling and concise when discussing why they should invest in your business.
Venture capital/capitalist (VC)
Places like Silicon Valley in California, are known for their VCs. Typically, VCs differ from angel investors in the sense that they don’t use their own money to invest. They often use the money generated from investment companies, and large corporations. Another difference is when the money is invested, VCs often prefer to invest in a startup that is already running, to cut down their chances of loss. They are likely to invest more into a business than angel investors.
Crowdfunding
In crowd funding you’re posting appeals online for people to contribute money, and entrepreneurs need to understand there are strings attached; for instance: you ask for $10,000 but only raise $5,000. If you haven’t reached the original sum required, some platforms will not give you the cash and may return the funds to the donors. The platforms also take a share of the money raised, since that’s how they fund their own business.
How will you finance your small business? These options are helpful, but you don’t have to limit yourself to only these, you can also finance it with a variety of different sources. In many cases, you will need more than one source to get the business off the ground. Beginning a startup means investing time, money and effort. It requires a comprehensive business plan that doesn’t just cover the current situation, but also envisions the future plan and growth of your company.
Video – What is a startup?
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