Sources For Access to Capital for Small Businesses

The main goal for a startup is to maintain cash flow long enough to exit the initial vulnerable stage, and establish a viable business. This generally involves determining and then finding the appropriate startup capital, and then having another source of capital ready for any problems. Small business banking services can help. Here are the steps for a small business to ensure that they have sufficient capital.

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Create a Realistic Business Plan

As cavalier as it may sound, potential business owners need to create a business plan that does not consider fund limitations. Some start a business plan from the perspective “this has to work” and begin trimming expenses before they are ever recorded. This kind of plan is excessively risky, and decreases the likelihood of a successful business. In addition, business owners present this plan along with other documentation when they apply for a loan. Lending officers will recognize a plan that does not account for expenses in a realistic way, and decline the loan due to excessive risk. Worse, they may decide that the business owner is not experienced enough to understand the importance of an accurate business plan. This is bad because loan officers not only evaluate the business opportunity in the plan, but the person who implements it.

Sources of Capital

One way to understand sources of capital is to look at business banking investments from the point of view of the investor. Investors run the spectrum from those willing to assume high risk for a high return to those who insist on a low risk investment for a more modest return. High-risk business investors are known in the industry as “angels”. These are entities with significant disposable funds, which often make the investment for the fun of it. They are often more interested in participating in a new venture than getting a guaranteed return. The beneficiaries for these investors are high risk because they have little investor supervision.

Angels give the owners the money, and let them have their heads. On the other end of the spectrum, venture capitalist organizations want a guaranteed return. They are not often suitable for startups, because they tend to wait until a business has passed the initial vulnerable stage, generally at least 5 years. They also exert maximum investor supervision, often replacing the company management outright. Banks are somewhere in the middle of the spectrum. They are definitely in the relationship for the return on investment. However, they will also allow the business owner some operating leeway, once the owner demonstrates the soundness of their business plan and the integrity of their own experience. For this reason, bank loans are often the most likely sources of capital for both the initial stages of a startup, and any refunding.

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Take Advantage of Government Resources and Programs

The government is very interested in stimulating the economy by promoting small business activity. A good place for a business owner to start is by visiting his or her city’s Small Business Administration (SBA) representative. He or she will have deep experience in startup financing, and will have all of the information to help find likely loan programs and to guide the owner through the submission process. Loans offered directly by the SBA include several types of programs under the Basic 7(a) Loan Guaranty. These include loans for specific types of businesses. They also help applicants that fall into a minority category.

Summary

The key to planning a successful startup is to choose the product and service the company will offer, and to determine and acquire the necessary financing to establish the business. Small business banking services can help potential business owners create the business plan, assemble the documentation, and acquire the funding they need.

Additional Resources:

Infographic via: Intuit

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