This is an excerpt from the full report, “Startling Facts about Financing Small Businesses.” You may download the full report for free here.
Running a small business means you face different financing decisions than those of larger businesses. Why? It's likely that you base your goals on your personal ambitions rather than those of a large group of investors...
Many industries warrant small businesses for underlying economic reasons. These industries or industry segments in which traditional small businesses dominate have three common economic characteristics. They typically serve a localized market, need little capital, and employ simple technology.
These underlying economics make it difficult for small businesses, even successful ones, to gain access to the general capital markets for funds.
If you are a traditional small business and you own any real estate, you may be able to get a mortgage from a bank or savings and loan. You can buy your equipment with a term loan or perhaps lease it. If your business has been around a few years and has a proven financial history, bank financing may become available but usually not as permanent growth capital.
As a traditional small business, it's not practical for you to sell bonds or stock. You, the owner-manager, or your friends and family must provide equity and rely on trade credit (credit extended to you by suppliers) to provide most of your short-term or working capital financing. Banks will provide most of your long-term external financing.
Financing Small Businesses with Growth Potential
Typically, a small business with growth potential has developed a new product or an innovative method of providing an existing service.
The personal computer is a prime example of a new product that spawned a new industry. McDonalds is a prefect example of a new way of providing an old service.
A small business with growth potential needs different types of financing as it progresses through it's life cycle-evolving from formation to maturity. Thus, it's important to understand the life cycle of a business and the financing sources used most often when funding small businesses with growth potential.
Knowing why you are a small business is step number one to financing small businesses. Understanding what stage the business is at in its business life cycle is the second step. Once these are understood, you are in a better position to solve your financing needs.
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