By Sharita Humphrey –
Every year, thousands of people start up their own businesses. Although they venture into different industries, they have one thing in common. They need money and capital to fund their business. A business simply can’t survive without finances. Even if you have the best idea, service, or product, it is not enough to sustain a company.
Securing funding for your business is not the key to its success. However, financing plays a huge role in your entrepreneurial journey, especially at the beginning.
Let’s dive into eight truths about securing financing for your business:
1. Small business owners should focus on cash flow over profit
A major mistake that many small business owners make is focusing too much on profit. What you should be doing is focusing on your monthly cash flow. Cash flow measures the ability of your company to pay its expenses on an ongoing basis.
Of course you want to have a profitable business, but make sure your cash in can support your expenses out.
2. Borrowing is not always bad
You might think of debt as always having a negative connotation. Many people think that debt should be avoided at ALL costs. But that’s not always the case, especially when funding a business.
Keep in mind that good debt is a tool; one that will help you set up your dream business. To utilize this tool efficiently, it is always important to do your research first. Find out what the best rates are for your business and which institutions offer them. Equipping yourself with the proper knowledge will save you from major headaches in the future.
3. Plan out your finances
You really can’t just wing it when it comes to business finances. Being an entrepreneur, you’re juggling a lot of things at the same time. From marketing and knowing the top trends to analyzing the competition, you need to make it a priority to get sufficient funding for every area of your business.
Just like any other part of your business, it’s important to plan your finances. Do your research. Figure out what you need to spend, and where. And determine where that funding is coming from.
And remember, you can always seek professional advice when you can’t figure out the best plan of action!
4. Long-term savings may or may not go a long way
Have you been saving up for your business startup? You may think that saving up for a long time will help you reach your specific funding goal.
But, keep in mind that inflation is a factor in how much those savings are worth when you go to spend them. The longer you save up for your business startup, the less the value of your savings becomes. This means that you might end up taking longer, and spending more, just to get your business started.
This is not to say that you shouldn’t save. But don’t wait to consider other financing options that might suit your situation better!
5. Many small businesses dip into their household income
A lot of small businesses use their household income to launch their business. Instead of borrowing money from banks, they would rather use their personal finances to get started. The main reason for this is the fear of paying interest.
While this can be a realistic option, you can also search for reasonable interest rates. Surprise household expenses can come up at any time and you will need your household income to pay for them. So do your research and find out if there are other solutions to your funding dilemma first.
6. Set up a business checking account It’s a good idea to separate your business from your personal accounts. Take any money you’ve saved and designated for your startup and open a new account that will be used for business purposes only. Click To Tweet
You’ll avoid the possibility of accidentally eating into your personal savings, and your bookkeeping will be so much simpler.
Your business account will hold all your business transactions. So when you pay a subscription or buy supplies, or when you receive income, keep everything going in and out of your separate business account.
7. Small businesses have a hard time accessing loans
Generally speaking, small businesses have a harder time getting approved for loans compared to big businesses. The reason is that small businesses have a harder time building their credit score.
But don’t worry! This isn’t to say it’s impossible to get a loan. And remember that there are other ways to fund your business.
For example, consider alternatives like attracting an angel investor, pledging some of your future earnings, or borrowing money from friends and family. Get creative and be persuasive.
8. People are using retirement funds for their business
This is a financial advisor’s nightmare! There are a lot of horror stories about people cashing in their retirement savings to fund their businesses only to have the business fall apart, leaving them with nothing. Of course, this decision is totally up to your discretion, and it may not be such a wrong decision in your case.
If you view your business as your retirement strategy, provided you have a solid business plan in place and have done realistic research, you might think about using your retirement funds to get your business off the ground.
Every business is different. So, don’t be afraid to seek financial advice from professionals for your unique situation. Don’t feel pressured to fit a certain mold just because another business owner did it that way. Research, study your business, and ask questions so you can make the best decision for you.
Funding can be a complex thing, but it doesn’t have to be impossible. Armed with these eight truths, you are prepared to make confident decisions to secure financing for your business.
About the Author: Sharita M. Humphrey is an award-winning finance expert, money mentor and Certified Financial Education Instructor. Once broke and homeless, Sharita completely transformed her life and is now a successful entrepreneur and one of the most in-demand money coaches for individuals and business owners of color. In 2020, Sharita was named the National Financial Educator of the Year.