The state of Michigan is bustling with entrepreneurship! In 2021, almost 500 new businesses launched, creating 45,000 jobs. Additionally, in 2021, the MI-SBDC helped generate over $300 million in capital for its clients. Starting a small business is an exciting venture, full of possibilities and challenges.
But even the most prepared of small business owners still find themselves in need of some additional financial support. Unfortunately, small businesses commonly fail during the first year because they hit a financial wall before opening or soon after. Many different factors contribute to these failures, and most of them are related to financial planning. For example:
- Business owners may fail to estimate the true cost of starting the business they have in mind.
- Business owners discover that it will cost more money than they have in order to get the business open or keep the doors open.
- Business owners have unrealistic expectations about available resources. Grants, tax incentives and startup loans are typically scarce, competitive and difficult to obtain.
- Business owners have unrealistic expectations about how quickly they will start making money. Most businesses need sources of cash to stay afloat until they start making money.
In order to avoid these common financial missteps, you need a well-researched estimate of what it will cost to start the business you have in mind. With an accurate analysis of your costs, you can align the reality of your available resources with your expectations about the feasibility of your business. Based on your financial situation, you may need to refine or reconsider your idea.
Most businesses start by “bootstrapping:” using their existing resources to work toward a larger goal. Working on your business part-time, developing a group of loyal customers, and other strategies can help you build slowly but steadily until you can achieve your vision. Every large business started as a small business, and every business succeeds by growing one customer at a time.
The first step to help yourself overcome the “first year climb” is to do a thorough assessment of your expenses. The MI-SBDC Starting a Small Business Guide has a two-page document to help you capture your expenses and calculate the cost of operating your small business.
Now that you’ve estimated your costs, it’s time to start figuring out how you will raise funding for your business. Let’s discuss various options to secure small business funding.
Evaluating your personal finances and assets is a good way to start understanding your current financial situation. Common forms of personal financial resources include:
- Liquid cash in checking and savings accounts
- Financial potential from selling assets, like a vehicle
- Funds you could receive as a gift (or investment) from friends and family
- Home equity
- Credit cards
- Cash value of life insurance
- Cash value of retirement investments
- Income from a full-time or part-time job while you build your business
Utilizing any of your personal financial resources carries risk. The more time and energy you invest into planning, analysis and refining your business idea, the easier it will be to thoughtfully consider the risks and potential benefits of investing your personal finances into your business.
Are you hoping for a grant? We’ve all seen infomercials, ads and websites telling us about “millions in free money” for startups and small businesses. The myth of “free money” has been around for decades, and clever scammers often extract a hefty fee without delivering results. Federal and state government grant programs exist, but grant funding rarely goes directly to businesses or individuals. Virtually all state or federal grant money flows to local governments, state agencies and nonprofits with highly restrictive eligibility requirements to help support regional or community programs.
Another way of financing your small business is through the use of loans. Traditional and non-traditional lenders use specific criteria to qualify or reject business loan requests. The following are key lender considerations:
- Credit History. Lenders and financiers are looking for reliable borrowers who have demonstrated responsibility and have a high credit score (typically 650 and above) over a period of at least 3-5 years.
- Cash. Lenders expect you to be invested in your own business and pay 20%-30% of the total startup cost either as cash or cash plus equity investment.
- Collateral. Lenders also expect you to pledge assets against the loan that have a net value greater than the loan amount. Note that “purchase value” isn’t the same as “resale value.” Banks and other lenders may discount the value of brand-new equipment to an amount they think they could get if they sold it to satisfy the debt.
Community development financial institutions (CDFIs) are private financial institutions that provide loans to small business owners, entrepreneurs and community organizations that might not qualify for traditional financing. Many CDFIs focus on serving low-income, disadvantaged and underserved communities. CDFIs are certified by the Community Development Financial Institutions Fund (CDFI Fund) in the U.S. Department of the Treasury, which provides funds to CDFIs through a variety of programs.
The Small Business Administration (SBA) has a 7(a) Program which includes financial help for businesses with special requirements. However, the SBA does not directly provide loans. For more information, visit: sba.gov/funding-programs/loans.
Crowdfunding is a form of raising money to support ideas or projects. With crowdfunding, contributions or loans from individuals or interested parties are collected and distributed via a networked and publicly observable platform. It is being used to support artists and journalists, political campaigns, charitable causes, new inventions, entrepreneurship, scientific research and more. Various platforms offering this type of funding can be found on the internet. State and federal rules governing these kinds of solicitations and securities are always evolving. If you’re considering crowdfunding, be sure to seek professional advice from a qualified financial advisor.
Asking for help, especially financial help, is never easy. Fortunately, you have the tools, resources, and support of MI-SBDC to guide you! If you have any questions about loans, lending, financial support, or anything else related to your small business, please connect with us here!