It's not always clear what people mean when they talk about small business funding. The fact of the matter is, it's not always clear exactly what impact that has on a business, how important it is for them to secure this, or even the types of business start up funding there is available. However, when you take a look at the situation, you'll find it's really not that complex.

Keep in mind above all that small businesses rely on steady funding until they get off the ground. It's a fact of business that they will have to operate in the red for a certain period in order to really start to take off. The US Small Business Administration lists poor or ill-timed funding as the second highest reason for small businesses to fail, and often companies have to close their doors because they couldn't hold on for a couple more months for the money to come in.

The first thing you need to do when you're looking at funding a small business is consider several things.

- Are you looking for short-term or long-term funding? How long do you think it'll take to show a return on the investment? How long are you willing to be in debt? A realistic and slightly conservative estimation of how much you believe you'll make will help you understand how much money you need and for how long

- Are you using the money for operating expenses (paying employees and bills, getting certifications/licenses, etc.) or capital expenditures that will become assets like buying equipment or real estate? Owning property that you can leverage can help you get more money in the future if you need it, but if you don't cover operating expenses, it all becomes worthless.

- What time frame do you need the money over? Getting a large chunk of money now will be a lot more difficult than getting smaller amounts over a period of months or years. Then again, if you need it for a specific and immediate purpose, then you may not have the option.

- Are you willing to assume all of the risk for the company? Your company may not succeed, which means that somebody will be losing money. Depending on how you got your small business funding will determine if it's entirely you, or somebody else who will bear the burden of that debt.

The last point brings up another thought. There are two basic types of funding available, and several kinds of sub-categories of them. However, the two primary types of funding are:

- Debt financing - This is where you borrow money for a set time frame and pay interest above the principal for the time it takes you to pay it back. The disadvantage to this type of financing is that the risk is squarely on you should your venture not succeed. No matter what happens, you are required to pay back the money you borrowed plus the interest. The advantage, however, is that you are the sole owner and controller of your company.
- Equity financing - This is where you sell a portion of your company to investors who then assume part of the risk for the debt. If the company fails, their part of it fails just as much as yours does. If it succeeds, however, they stand to make a much bigger return on their investment than they would with just interest rates. The problem with this sort of financing is that you don't have total control over your company, and might even risk losing it to your investors if you're not careful.

Keeping an eye on how small business start up funding works and asking yourself simple questions will help you get a clearer picture of how much you need, what you need it for, and the risks involved in how you get it. In the end, the smartest thing you can do is plan ahead and understand everything you can about how you get small business funding.
 

 

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