Getting a small business off the ground is a huge achievement, but establishing financing on a solid footing is critical to whether an enterprise ultimately succeeds or fails.
As a banking officer dealing with financing requests every day, the most common question I hear from founders of startups is, “Should I finance with equity or debt?” I’m here to tell you, there are no pat answers. And even worse, it can be a life and death decision: More than 500,000 businesses are established in America annually but half of them fail within five years. The No. 1 reason for failure is a bad strategy backed by surplus optimism, but the next biggest cause of failure is a lack of funding.
Small businesses attracted nearly $1.2 trillion in financing in 2015, according to the Small Business Administration — almost $600 billion in bank loans and $593 billion from other sources, such as finance companies, angel capital and venture capital. However, when it comes to funding startups, only 8 percent of capital comes from bank loans.
Bootstrapping startups requires financial creativity. Personal credit cards are used for 8 percent of funding with another 2 percent from business credit cards. Home equity loans supply 3 percent of capital needs while other personal assets made up 6 percent of startup capital. One quarter of all startups use no capital to get going while 57 percent draw on personal savings.
Here are some considerations for startup entrepreneurs seeking capital.
Credit card debt: This type of high-interest debt, often costing 13 percent or more, can work for small capital needs like those required by a services firm that needs some computers and office equipment to start selling its services and generating cash flow. For larger amounts, capital should be established on a more permanent footing.
For More information:- Mark Abell