One of the most important thing for a small business owner is finding the working capital for their business. Unluckily, most small business owners are doubtful when it comes to finding the right type of funding, and most self-proclaimed professionals they may listen to are equally misguided.
The main thing is you require capital for your small business. Your capital requirements will change through the years that is why you as a small business owner need to build a strategy for capitalizing your small business from the start. This is where most small business owners make a mistake.
They come up with outstanding ideas, good marketing, hire the appropriate people; but they ultimately fail because they never planned for their capital requirements.
Evaluate Your Financials
Consider about capitalizing your small business after evaluating your financials. The sensible business owners will not only fulfills short-term funding requirements, but will dig the well as deep as possible or at least lays the foundation for doing so.
There are at least five factors that you need to consider about your small business financials. It begins with the personal assets of the principals. It is the worst possible layer, even though the most commonly used. Sometimes there is no other choice; however, my preference is to build businesses using other people’s money. Secondly, your friends and family is another exploited source of funding. The other three factors are credit, loans and investors.
Not All Funding Is Created the Same
The most important lesson is the fact that all cash is not always created the same. As you take a look at resources of working capital for your small business, you need to consider the following:
Debt vs. Equity
Any funding that you get is either going to be debt or equity. Equity calls for the surrendering of possession. You need to be clear on what type of cash you are getting. For the most part, banks and businesses address debt, and investors address equity. Equity offers the investor a portion of future earnings. Therefore, while it may feel like free cash, this is the most expensive capital you could get for your small business.
Does the cash reduce your control? Bringing on investors or partners will reduce your control. A lender may additionally request financial mistakes or independent audits. You need to be aware of what you are giving up.
How is the lender or investor getting the cash? Are you personally generating it? Is there a blanket lien in your assets? If you default, whom will they go after for repayment?
Are you able to transfer the funds to the next business owner? In other words, is the capital for you or is it for the business? It will not do you much good to sell a business if all the working capital remains tied to you.
Ease of Access
How easy is it to get and how much time will you need to invest to get the capital that you need? Are you adding more employees in your team that are invested in your success? Pierre Omidyar required VC money for eBay, not due to the fact he need it, but because he need help building an excellent team. Occasionally bringing on investors and surrendering control is exactly what you actually want to do.