Identifying Funding Sources
- Bootstrapping – is the primary way that most entrepreneurs fund their start-up business. Bootstrapping includes providing personal funds, obtaining credit lines or credit cards, being frugal in business purchases (i.e., buying used furniture or equipment, etc.) and obtaining start-up funds from family and friends.
- Governmental SBIR/STTR – The Small Business Innovation Research Grant program and the Small Technology Transfer Research program are government funded grants that small innovative businesses may apply for through each branch of government when that branch solicits Requests for Proposals. These grants are highly competitive and difficult to obtain, and they focus on targeted areas of research of interest to the governmental agency.
- Debt – For many small businesses who are in need of obtaining physical assets for the business, taking a business loan is a great option. Business debt is typically taken out by the entrepreneur in the name of the business in the form of a loan that will have a payback schedule over a number of years. Debt payback includes interest attached to the debt and can take anywhere from five to 20 years to pay back.
While a business loan sounds simple, there are many different types of loans and different requirements for each loan. Entrepreneurs need to be aware of the different loan product requirements, and they need to be ready to provide their financial background as well as some form of collateral to secure the loan.
Equity Capital is the most difficult form of money a business can try to secure.
Equity Capital is an investment made by another person or entity into the business that typically requires the business to provide a higher rate of return to the investor than other forms of business finance. BusinessDictionary.com defines equity capital as “invested money that, in contract to debt capital, is not repaid to the investors in the normal course of business. It represents the risk capital staked by the owners through the purchase of the firm’s common stock (ordinary shares). Its value is computed by estimating the current market value of everything owned by the firm from which the total of all liabilities is subtracted. On the balance sheet of the firm, equity capital is listed as stockholders’ equity.”
Planning for Financial Success
- Financial Projections – is the planning for and estimating the costs of doing business versus the opportunity to bring in revenues to support business operations. Projections are typically calculated for three to five years. Some projections can go further than five years; however long term projections should be reviewed in timely increments.
- Financial Statements – In essence, a financial statement is a summary report that shows how the company used funds over a given period of time. There are three basic financial statements, including the P&L statement, balance sheet and cash flow statement. All three financial statements will provide enough information for the business to assess the financial health of the organization.
- P&L – The Profit and Loss statement can be a simple accounting form that shows how the net income of the organization is arrived at over a stated period. The P&L statement includes gross revenues – cost of goods sold = gross profit. Gross profit – general and administrative – Marketing and advertising – research and overhead = Net profit. Net Profit – taxes = total profit.
Gross Revenues – Cost of Goods Sold = Gross Profit
Gross Profit – Expenses = Net Profit
Net Profit – Taxes = Total Profit
Balance Sheet – The Balance Sheet is a financial statement that summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
Cash Flow – Cash flow is the movement of cash into and out of the company. A cash flow statement helps the business track where the funds are being spent and/or track how much has been spent by category. All businesses need cash flowing into and out of the business to survive, and the cash flow statement is a tool to track the money.