Opening a small business, developing a startup company or investing in a franchise can be difficult — there’s no way to sugar coat it.
You have to develop a business plan, find a location, register a business name, establish a legal structure; all before you can even open the doors.
However, one of the biggest business decisions you will make comes long before you can delve into any of those finer details. How are you going to pay for this new venture?
As a new entrepreneur, your financing choice can be the difference in how your business develops, but that decision becomes increasingly more difficult when analyzing the barrage of funding options being thrown at you. While each financing method has its own advantages and disadvantages, it’s important to thoroughly explore all of the options so you can choose the best fit for your business needs.
Debt and growth potential
One of the first things to consider is how long you want to carry your financing debt. Of course, no one wants to accrue debt, but it’s inevitable when starting a business. In order to prepare for that, your financing decision should be based on projected budgets and cash flow you expect for your business. It is also critical to build in the cost of the debt services into your business plan.
For instance, if you are evaluating equity investment options, understand what the growth potential is for your business and what potential future exit strategies you may need to implement. This will provide you vital information from the start, so you can have an action plan for when those debt services begin to surface.
The options available to you
Outside of equity investment options — like a home equity loan — there are four other common financing options for entrepreneurs starting a business. Retirement and 401(k) rollover programs, like Pango Financial’s DreamSpark plan; SBA 7(a) loans for small to medium businesses; Marketplace Lending for non-bank lending opportunities; and unsecured lines of credit are all popular funding alternatives.
Before you are able to decide what funding strategy is best for your business, it’s crucial to first complete a personal financial statement. Building a personal financial statement not only provides knowledge to when and where you are spending your money, a good plan for anyone, it also provides a clear picture to lenders or investors of your financial health and history. Enlisting the help of an experienced financial agency can provide valuable insight during this process and will help guide you along on your financial journey.
Another helpful tool as you move forward with your financing option is to provide yourself access to a large network of lenders in banking and alternative lending. These experts can be used to compliment one another or as stand alone resources for all your consultation needs.
Once you’re able to fully immerse yourself in the alternative funding world, you’ll quickly learn what sets each option apart. For instance, the DreamSpark 401(k) rollover plan is not based on a credit score and does not require a personal guarantee, whereas an SBA 7(a) loan requires strong credit, along with the possibility of collateral plus a personal guarantee.
On the other hand, unsecured lines of credit do not require collateral, but applicants must have a credit score of 680 or better, while Marketplace Lending options present different requirements and risks, but have quick approval times and are available through online platforms.
It’s also important to remember that whatever funding option you choose will also depend on what kind of business you want to open. If you’re looking toward a startup business, odds are funding opportunities will be solely dependent on your personal financials, like your credit health, financial resources and savings. If you’re starting with an existing business and transitioning to something new, the assets associated with that business could be considered for collateral to pursue various debt financing options.
No matter what plan or financing option you feel best suites your needs, it’s important to remember that each business is unique, which means each funding option will be unique as well. One of the best things to do is think about conducting a customized financial analysis first, to help evaluate your options before jumping in.
William Keenan is the Chairman & CEO of De Novo Corporation and CEO of Pango Financial. A results oriented executive, with a track record of systematically improving organizational performance across a range of success drivers, Keenan has directly, and on an interim basis, managed the start-up, turnaround and repositioning of a significant number of lines of business, banking institutions and insurance companies.