Small Business Start-Up Financing

So you’re thinking about starting your own business.  Congratulations!  If you’re like me when I was thinking about opening my first business, it was a mixed bag of emotions ranging from exhilarating to terrifying on an hour by hour basis.

Whether you’re mid-career in your 40’s or thinking about this small business start up as an encore career, you’ll want to know what you’re getting yourself into before hanging that “Open for Business!” sign up.

Why Do Most Small Businesses Fail?

The Small Business Association is a wealth of knowledge for small business owners.  For example, SBA statistics on business failures indicate that 30% of small businesses fail within the first two years, half fail within the first five and a full 2/3rds fail within their first 10 years of existence.

So, why do most small businesses fail?  Among other reasons, a big factor is that many of these entrepreneurs simply run out of money.

Here are 5 ways to finance your small business start up to help make sure that by the year 2026, your business has not only survived, but continues to thrive!

Financing Tip #1 – Have (Lots of!) Money in the Bank

There are many factors behind when you can expect your small business to turn a profit including but not limited to:

  • What kind of business are you opening? For example, a traditional brick and mortar store will have far higher start-up expenses than opening an online consulting business.
  • How quickly will you attract customers? For example, where I live, new restaurants that open and serve great food at reasonable prices are often quickly filled to capacity.  Compare this to opening a new business coaching practice.  It may take you time to establish a reputation in this space and have enough people sufficiently know, like and trust you  to hire you for this critical role.
  • How profitable is your business?  Going back to the example above, while your new restaurant may be full, your profit margin may be thin at only 2-6%, while consulting businesses can command margins well in excess of 30% of sales.

Given the wide variety of factors at play, if you have no other sources of income, consider planning to be financially self-sustaining for a minimum of three years as you start-up your business.  This means if your take home pay is currently $8,000 a month, consider having about $300,000 in the bank before you quit your day job.

Financing Tip #2 – Keep Your Day Job

More and more entrepreneurs are starting a side business while continuing to work full or part time.  Over the last several decades this has become increasingly easy to do given your ability to have 24/7 access to emails and the internet on your favorite device to being able to hire a virtual assistant to help run your business while you work during normal business hours.  This keeps some much needed cash flowing in the door while you build your small business start-up.

Financing Tip #3 – Open an HELOC

The last thing you want to do is run up significant credit card debt to finance your business.  However, if you do exhaust your financial reserves while starting your venture, tapping into a Home Equity Line of Credit can be a great source of financing.  Interest rates are low and all interest you pay on these loans is tax deductible.  Just be sure to establish your HELOC before you let go of that day job.  Lenders will want proof of income and you’ll have a much easier time getting qualified before you decide to take the leap.

Financing Tip #4 – Find Fruitful Part-Time Work

If the success of your small business is important to you, it may be worth swallowing your pride a little and finding part-time work to pay the bills.  Whether you decide to wait tables at a high end restaurant or hang out around college campuses ferrying mildly intoxicated students home via Uber, you can make some serious coin to plow back into your new venture.

Financing Tip #5 – Peer-to-Peer Lending

The first four tips are things to think about right now.  Peer-to-Peer Lending is one for you to file away once you’ve been in business for a few years.  Reasons why small business owners love Peer-to-Peer lending include the ability to get approvals more quickly and with a higher chance of success than via traditional bank financing.  Interest rates will be higher than those associated with an HELOC, but it’s much better than maxing out your credit cards with the potential to ruin your personal credit.

Your Assignment

Congratulations again on starting or being about to start your exciting new business venture!  In addition to all of your business plans, marketing and sales concerns be sure to think about which of the 5 strategies listed above you’ll use to finance your business.  Doing so will give you more confidence, give you room to make mistakes along the way and give you the best chance to be among the minority of small business owners that proudly celebrate their 10th year in business!

Originally published on Nerdwallet