It’s looking like this new decade is going to be the age of the entrepreneur. Thanks in no small part to the success of business-focused Instagram and Facebook accounts, people are getting less and less satisfied with their 9 to 5 salaries, and every day more hopeful individuals are making the leap into opening their own business.
Despite its growing popularity, it isn’t an easy decision to make. You’re giving up comfort and security. You aren’t going to get a reliable and consistent paycheck, and you’re going to be working all day every day for what could be several years before you see a cent of profit. Once you do, though, you’ve just taken the first step on the path to true wealth, and you can hire someone to take your place while you step back and reap the rewards.
That’s not to say that the reality is hopeless, though. The 2010s saw the exponential growth of e-commerce, and the 2020s are going to see that grow even more. More people are buying more stuff, and that’s great for you as a new business owner. It means there’s more competition, but it also means that you have the entire globe as a potential market, with anyone able to browse your stock from the comfort of their home using nothing more than their fingertips.
So if this is really what you want to do, you have a lot of preparation ahead of you, not the least of which is to decide what type of business you want to have. You could open a retailer, but then you have to think about what kind of retailer you want. Do you want a restaurant? In that case, you’re going to need stoves, grills, sinks, gas lines, and more. That’s not even thinking about offering a service, which itself has endless possibilities. What this all means is that there is no one-size-fits-all funding for a business. You could end up spending $250,000 dollars on kitchen equipment to open a restaurant or $5,000 dollars to open up a small corner shop.
That being said, there are a few loans and strategies that every business can take advantage of regardless of the business model. Below are some tips and advice from entrepreneurs who have been through the mill.
Start Off Small
This should be the first thing you do, regardless of the financial resources you have available to you. It’s okay to be hopeful of your first venture and to be optimistic about its success, but blind optimism can be critically damaging to your operation.
You need to keep a dose of healthy skepticism in your back pocket. Otherwise, you’re just asking to be stung.
So don’t go throwing all your life savings into your first business; that’s not a smart idea, and it’s irresponsible. Start off with something small, like an online t-shirt store, and work your way up from there, gaining experience and knowledge in the process.
Calculate Your Expenses
Once you have your business in mind and you’ve done the market research to make sure there is a consumer base for it – and that you can turn a profit with it, it’s time to calculate how much this business is going to cost to get up and running. This is only going to be an estimate, but it’s a good sign of things to come.
The U.S. Small Business Association conducted a study where it concluded that the average micro business costs around $3,000 dollars to get started, while other home-based larger scale ventures cost anywhere between $2,000 and $5,000 dollars.
Drew Gerber, the founder and CEO of WasabiPublicty – a technology PR firm, suggests that entrepreneurs need at least six months’ worth of fixed costs on hand before launching a business. He also suggests having a plan in place to cover your first month’s expenses regardless of business performance and to make sure you’ve done your market research and marketing before you open the front door, whether physical or metaphorical.
The primary reason that new businesses fail is that they run out of cash. Inexperienced business people have a tendency to underestimate expenses in their business plan and financial forecasts while overestimating the amount of revenue the business is going to bring in. You have to stay realistic, and you have to remember that, as your business grows, so too does its expenses.
Being able to properly manage your business cashflow means being acutely aware of the different types of expenses there are. That’s not to say what each individual expense is, which can number in the hundreds or even thousands for some businesses, but what categories nearly each one can be fit into. Almost every cost you have falls under one of the two types in each of these three categories. For example, rent is a variable, essential, ongoing cost, whereas a bucket of paint is a fixed, optional, once off payment.
One Time Single Payment
This is a one-off payment that doesn’t recur on a regular basis. Things like equipment and décor fall under this umbrella. How much this is going to be depends on the type of business. Like mentioned earlier, this is going to be really high in restaurants and other equipment-based retailers and not so much for home-brewed microbusinesses. These costs are going to be disruptive to your cash flow, and you’re going to need to make up the difference in the months following a big purchase.
On the flip side of single payment costs, you have recurring ones. These are expenses that are paid on regular, usually predictable, occurring dates and can be planned for accordingly. These costs can either differ in amount from one payment to the next or stay the same depending. Most of your business costs are going to fall under this umbrella – the likes of bills and utilities, labor, stock or materials, and transport costs.
Essential costs are things that need to be bought in order to ensure the success of the business. There is no room for maneuvering with this type of cost, as it constitutes the expenses that are necessary to the operation functioning normally. Rent would be one of these, as would labor.
As the name implies, optional costs are the opposite of essential costs. These are things like a new carpet for the front of the store, some better-looking shelving, or a fresh coat of paint. These things help, but none of them are essential to the business operating and growing. These should never be made a priority and should only be purchased once there is enough cash saved up in reserves for them.
Your fixed costs are expenses that do not change in amount from payment to payment. Each one stays the same regardless of business performance, hours, or any other metric, allowing you to plan well for it. Things like rent would constitute as a fixed payment.
Variable costs are the costs that change on a regular basis. Whereas fixed costs stay the same regardless, variables are based on certain metrics. For example, the price of your electricity bill is going to change based on how much you left the lights on, and your labor cost is going to change depending on how many people you have scheduled for shifts.
Estimate Your Cash Flow
Once your expenses have been calculated, you need to figure out how much money you’re going to have coming in. Having a lack of cash flow is a killer for startups, as complications and admin difficulties can result in payments being delayed, despite the funds being there, and can kill the business stone dead.
You should draw up at least three months’ worth of cash flow, to begin with. Including separate plans for the worst-case and best-case scenarios, not just calculating for fixed costs, but for the cost of goods sold as well.
Make sure you know how much interest you owe on loan, and plan accordingly. Having all this down on paper gives you a solid foundation to build on, and gives you a realistic estimation of how much cash you’re going to need to generate to get the business growing.
So all the initial planning and calculation is out of the way. Now it’s time to start thinking about how to get the finances to begin with in the first place. There are a myriad of ways to do this, and we’re going to be talking about some of the more popular options.
Again, there is no one size fits all here. You may have $5,000 to $6,000 in disposable savings you wish to use, for instance. Alternatively, you’re planning on applying to the bank for a loan or grant; everyone’s situation is unique.
We’re going to look at some specific examples of the options available to you below. Note that these are only types of funding, not examples of institutes, because you could write tomes on the amount of different financing institutions and venture capitalist firms out there. We do go into more detail about small business loans down below, though, if that is what you’re looking for.
Community Development Finance Institutions
Community development finance institutions, or CDFIs for short, number in the thousands across the United States.
CDFIs are non-profit, non-bank alternative lenders for businesspeople and entrepreneurs just getting started on their business journeys. The institutions offer reasonable loans, usually with less interest rate than a bank; however, it can be difficult to get one due to the high demand for them.
CDFIs differ from banks in a few, very key ways. Firstly, most banks check your credit score before putting your loan through. If that score comes up poor, then you may have a hard time finding a lender. CDFIs, on the other hand, use credit scores differently. Instead of solely the score, the institutions look at the reason for the poor credit, and if it can be explained reasonably, then your loan may still be approved. You also don’t need nearly as much collateral for a CDFI loan as you would a traditional bank.
VCs are external groups that exchange funds for part ownership in a business. The amount of money offered to entrepreneurs and the percentage of ownership given in exchange is negotiable and usually based on the estimated value of the business.
If you have a particularly good business idea, then this is by far the best option available for you. There is no collateral involved, nor is it a loan. You may be skeptical about handing over a chunk of your profits, but if your business has enough potential to get VC funding in the first place, then chances are there isn’t going to be any lack of profit down the line regardless.
On top of all that, it’s not just financing you’re selling a part of the business for. Venture capitalists are experienced businesspeople; they have been through countless companies and have a wealth of knowledge that you can and should take advantage of. They do, in a way, become your business partner, after all.
Partner financing is relatively unknown compared to the other funding options but can be very effective for the right type of business. It involves a separate entity in the same industry, as you are helping to fund your growth in exchange for special access and privileges associated with your business, whether that be access to staff, production, product, or profit.
It is usually a combination of all of these things, with a partner buying a stake in the business similar to a VC. Usually, partner financing comes from big players in your industry, so the benefits you get from it far outweigh the disadvantages.
Like VCs, this is also not a loan. There is no collateral or repayments involved, so it is less risky than some other finance options you may be looking at.
Angel investors have soared in popularity over the last few years. Angel investors are normally seen as just a different type of venture capitalist; this is sort of true. There is one massive difference between the two, though, and it is the reason for its name.
Whereas VCs look for demonstratable growth of your business and only invest in projects believed to have high potential, angel investors are much more likely to invest in businesses in the startup stage without that growth or potential yet on display – hence the name angel.
It is a more personal experience to that of a VC, and your angel investor can usually provide you with invaluable advice and guidance. After all, nobody invests to lose money.
A lot of businesses, especially B2B businesses, don’t get paid until sometime after it has billed out its invoice. The result is that the cash flow isn’t there to pay what needs to be paid, despite strong sales.
With factoring services, a company fronts you the money for outstanding invoices, which you then pay back once your debtor pays you.
Factoring is not a startup investment solution, but it can help in keeping cash moving and prevent you from going under in the early days.
Like angel investors, crowdfunding has really taken off in the last few years. Sites like Kickstarter and IndieGoGo have allowed businesses of all shapes and sizes to raise incredibly high funds before any foundation work has even been laid.
You just upload your pitch to a site and market the hell out of it, and people who want to see it happen pitch in whatever amount they want – no equity needed, no repayment, and no interest.
Most companies offer some incentive for doing this, even if it’s just something small, like a soundtrack for an indie game.
Just be sure to read the fine print, as a lot of sites require you to raise your full goal to keep any money you make, while others have ludicrously high processing fees.
Grants are arguably the most valuable funding option available to entrepreneurs. The government has schemes set up that afford businesses with the potential to thrive funding, free of repayment or equity.
There are federal goals and requirements you need to meet to get one, but it can never hurt to shoot your shot all the same.
Peer to Peer
P2P is a new type of small business financing made possible by the popularity of the internet.
A P2P is a website that connects potential borrowers with lenders, tracks your records, and handles the transfer of funds.
With it, there are no banks involved, unless one is funding the lender. Regardless, it can be a useful alternative to regular loans for small businesses looking to get a start.
It is only available to people in certain states, though, so double-check that you’re eligible for this one.
Convertible debt is an unusual type of financing that involves taking out a loan with the intention of turning the debt into equity in the future. It is usually a collective agreement between the borrower and an individual investor or investor group.
It is an easier loan to manage than most; although, you do have to be okay with relinquishing some control of your business in exchange.
Where to Get a Small Business Loan
Your bank is going to be the first obvious answer. However, that doesn’t speak to the full possibilities of a small business loan. You don’t have to go through a traditional institute, and many organizations offer small business loans online instead of looking for any number of loan options we just talked about.
One notable example of this is Lendio.
Lendio is a great option for any small business looking to raise a bit of capital and serves as a sort of as a P2P/matchmaking loan service.
You fill out an online form, and the site then matches you with any of its lending partners whose terms meet yours.
The application is fast, you have your answer within 72 hours, and the loans you have access to are very personalized. However, some of the loans have high-interest rates, and there have been reports of hard credit inquiries with some of the lenders.
Another option open to you is to use BlueVine.
BlueVine actually offers three types of financing: traditional term loans, factoring, and lines of credit.
While the traditional loans and lines of credit are certainly great, its BlueVine’s factoring service that is the real selling point here. You can use your invoices as collateral on the factoring funds you get and apply for up to five million dollars. Like the part on factoring above mentioned, though, you don’t have access to the service in every state, so double check again.
Aside from the factoring, BlueVine’s application process is quick and easy. It also goes easy on you for your credit score, although you aren’t going to be getting a five million dollar loan with a score of 300 anytime soon.
There are only two real downsides to the service. The first is that you may face large fees depending on the terms of the loan you take, and the second is the limited universal accessibility of factoring.