The Business Plan: A Roadmap and a Tool for Funding - Part 2 of 3


Written by W.N. Davis, TSU College of Business student.

Financing the Small Business: Viability and Strategic Considerations

Financing a small business is pivotal for its launch and growth, with each financing option presenting unique benefits and challenges. Entrepreneurs need to carefully evaluate these to determine the best fit for their business model, financial health, and growth aspirations. (Con'd below)

Evaluating Financing Viability:

Personal Savings: are often seen as the most straightforward financing source. They allow entrepreneurs to retain full control over their business operations without any obligations to lenders or investors. However, the use of personal savings is super-duper risky as it ties the survival of the business directly to the entrepreneur’s personal financial health. This option is practical for those who have substantial savings and are willing to take a high personal financial risk. But, personally, I highly advise against doing this.

Friends and Family: offer another common source of funds, often characterized by potentially lower interest rates and somewhat flexible repayment terms. This option works well for those who have amazing personal relationships that can withstand the strains of financial agreements. However, this can be considered a long shot for long-term financing needs due to the potential for personal complications and limited funds. Also, another one I would advise against. Heavily.

Mortgage Loans and Commercial Loans: are more traditional and widely used due to their ability to provide significant capital. These loans are backed by collateral (in the case of mortgage loans) or a strong business plan and credit history (commercial loans). These options are viable for businesses with solid business plans and those who can handle structured repayment plans. However, the risk of losing collateral or failing to meet payment obligations makes these options more suited for businesses with established cash flows and assets.

SBA Loan Programs: provide a layer of security and accessibility that makes them a highly viable option for many small businesses. Given their government backing, they often feature lower interest rates and more favorable terms, making them ideal for startups and small enterprises that qualify under the SBA’s criteria.

Venture Capital (VC) and Business Angels: involve exchanging equity for funding, plus the strategic guidance these investors often bring. These sources are suitable for high-growth-potential startups, especially in technology and innovative sectors. While they offer substantial funding and invaluable business insight, they can be a long shot for most traditional small businesses due to the rigorous selection processes and the high return expectations. Only a small percentage of startups are suitable for VC or angel investments, making these options less viable for the typical entrepreneur.

Business Development Companies (BDCs) and Economic Development Organizations: are excellent for businesses looking to impact their local economies or those needing support beyond simple financing. These sources often include grants and developmental support, which can be crucial for success in certain industries. However, they might not provide the large sums of capital that might be obtained through more traditional lending or investment routes.

Sale of Stock (IPOs): is typically a strategy for well-established companies looking to expand significantly. This option involves going public, a complex and expensive process that includes revealing detailed financial and operational information to the public. This option is a long shot for most small businesses not only due to the scale required but also because of the stringent regulatory requirements involved, and sometimes lack of connections to brokerage houses. The most famous example of an IPO is Steve Madden Shoes offered by Stratton Oakmont in 1993, as famously captured in the movie “The Wolf of Wallstreet.” (A personal favorite).

Credit Cards: are readily accessible and can be useful for immediate, short-term financial needs or bridging cash flow gaps. However, due to typically high interest rates, they should be used cautiously and strategically, preferably as a last resort.

State Agencies and Programs: often provide specialized assistance that can make them a viable option for businesses that meet specific criteria related to industry, location, or development stage. These programs may offer not only financing but also valuable business support services, making them a practical consideration for businesses looking to maximize their impact on local economies.

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