When starting up a business, irrespective of the size some money is required to finance it. This money is the capital which is the bloodline of any business. Many small businesses fail because of under capitalization. The size and type of a business determine the source of funds to use (Adelman & Marks, 2013). Determining how much one needs to start up and run the business until it reaches the point where sales equal the total expenses is hence important. This paper aims at discussing the various modes of financing that are available for a small business start-up. It will further recommend the most beneficial methods of funding for financial growth. An approximation of the capital required to start up the business will also be highlighted.
Bootstrapping also known as self-funding is a common and efficient method of financing start-up expenses but may not cover long-term operating costs. Entrepreneurs starting a business for the first time experience difficulties obtaining funding since they do not have some track record to show. Investments can be made from personal savings or contributions from family and friends. Less formality makes it easy and first to raise funds. Also, there are no costs involved, and one does not answer to anyone. The method also increases one's leverage in case of future fundraising and force the entrepreneur to focus on revenue thus doing away with luxuries. Being your own boss is a limitation in that one may not know when they are slipping.
Microfinance providers offer loans to individuals that may not access credit from the conventional banks due to lack of sufficient collateral or those with unfavorable credit ratings (Pakroo, 2016, p. 88). Loans provide adequate funds to cater for the start-up expenses and also cover long-term operating costs. Accessing finances from micro-lenders is easier compared to banks for first-time entrepreneurs. Also, they offer advice and expertise which help borrowers to nurture their businesses increasing the likelihood of success. Since the amounts borrowed are not excessive, it is hard for a micro loan to get over one's head on a worst case only the business may go down, but this may not wreck the financial future of the entrepreneur. Inflated interest rate and limited funding are the biggest drawbacks for microfinance loans.
Thirdly entrepreneurs may source funds from angel investors who are financiers who put their excess cash in startups in exchange for an ownership stake. In addition to capital, they also offer mentoring advice (Adelman & Marks, 2013 p. 53). Should a business go down, these investors do not expect their money back unlike banks. Also, their business agreements are flexible. The limitation includes extended periods of time before finding suitable angel investors and once found they may set the bar too high due to their high expectations. Also, the control of the business becomes limited, and there is profit sharing since part of the ownership is sold.
Loans from microfinance lenders and angel investors will be the best form of funding to enable financial growth of the business because they are capable of covering the start-up expenses and long-term operating costs of the business.
Start up costs is incurred before the business starts making money hence it is important to determine the capital requirements and where the funds will be sourced. It is important for the entrepreneur to know how much is required as startup capital so as to determine how long it will take to recoup it (Pakroo, 2016, p. 83). The food and beverages distribution will require approximately $125,000. The costs will include among others, rent and security deposit, registration fees, appropriate licenses fees, initial stocks costs, and furniture.
In conclusion, for entrepreneurs who want to grow and grow their business fast, they need to consider external sources of capital. Should an entrepreneur bootstrap and run the business without external funds he may not be able to take advantage of any market opportunities. Borrowed funds make starting a business easy; however, responsible entrepreneurs should determine how much they need to start up a business and what proportion of this should come from borrowing.
Adelman, P. J., & Marks, A. M. (2013). Entrepreneurial finance (6th ed.), Pearson ISBN 978-0-13-314051-4
Pakroo, P.J., (2016). The small business startup kit for California (11th ed.). Bang printing.
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