Business Financing Options
for 2022

Building a Small Business

Many small businesses begin with just an entrepreneur's dream. An aspiring entrepreneur may want to turn a passion into a business. That might be cooking, gardening, renovation, photography, or dog grooming. It’s incredibly rewarding to build a business from just a passion and an idea, turning it into the sort of venture that puts you in complete control of your life and your finances.

Some other entrepreneurs want to be a part of a bigger, more established team. They may opt to take a safer route by purchasing a franchise, which comes with an established brand and proven operational systems. Franchises are also available in every industry or interest. Fitness centers, restaurants, hotels, and retail locations all offer lucrative opportunities for smart business owners. No matter how the business is conceived, built, or grown, owning your own company is often an important part of the American dream.

Entrepreneurs are also becoming increasingly diverse

As the relationship between traditional employers and employees evolves, more and more types of people are becoming business owners for any number of reasons. After all, the American worker’s average tenure at his or her job is now about 4.1 years, according to the Bureau of Labor Statistics Employee Tenure Summary (January 2020 ). People are leaving jobs quickly for greener pastures, and for many people, that means ownership.

It is not uncommon for someone who has been terminated from their job to then take the opportunity to start a business. They may have dreamed about being the boss for some time, but were unwilling or unable to assume the risks associated with starting a business while still gainfully employed. Often, this type of entrepreneur launches an enterprise in the same field they have always worked in and vows to do it better.

In addition to diverse reasons for building companies, the community of small business owners is growing more diverse as well. Guidant Financial found that from 2017-2018, there was an 82% increase in minority business ownership mostly attributed to African American and Hispanic business owners. And while women owned only 4.6% of all business is in 1972, today, 42% have a woman at the helm. And those companies are growing at a faster rate than others, according to the the 2019 State of Women-Owned Businesses Report commissioned by American Express

There's also a wide range of ages for people who are interested in running their own company. According to a study by Guidant Financial, over 54% of business owners it surveyed were 50 years or older. Many of these entrepreneurs are using their small businesses as the crowning achievement of a successful career.

Financing and Business Loans

It doesn’t matter if it’s your first company or tenth, where you live, who you are, or how far you’ve come with your current venture. You need to know as much as possible about financing. Understanding the world of business loans can lead to a smooth startup, and identifying the signs of when you need more funding-when you need more funding can make a big difference in the cost of capital.

Once you're committed to starting a business venture, you’ll need to take the time to write a business plan. A good business plan gives anyone reading a window into what your company is all about and what you expect the future to hold. The business plan will explain what the business is, who the customers are, where it’ll be located, when it will operate, and show that you understand why the answers are what they are.

Always remember that a business loan is a vote of confidence from a lender. If you receive a business loan, the lender is telling you that they believe you’ll be able to repay the loan and interest in full and on time. And they’ll base that decision on many factors, from the expertise of those running the company, your financial data, and the holistic vision you lay out in your business plan.

Typical Start-up Costs

Going back to the Guidant study, almost half of the respondents surveyed reported that they used less than $50,000 to start their company.

Source: Guidant Financial

"Many expect business ownership to be a very costly venture, and while it can be, almost half of all business owners surveyed said they used less than $50,000 total to acquire or launch their business. Another 18 percent spent up to $100,000," according to the study.

Starting your own company doesn't have to completely drain your bank account if you plan it well. But no matter how much you spend to get your company started, you'll need funding to keep the business going long after launch day. While $50,000 may seem like a small sum in comparison to the income that a business can bring in for years to come, it can still be difficult to pull together a big lump sum of money like that to get started.

Plan Ahead for Capital Needs

With the Federal Reserve lowering interest rates and the stock markets on the rise, right now is a perfect time to consider when you may need capital in the future. Because if your company’s ducks are in a row - financial data double-checked and readily available, loan payments made on time and in full - this is a great time to secure funding if you can predict that you’re going to need additional cash on hand. The markets are looking strong, and you can take advantage of better terms and lower interest rates now instead of hoping things continue to improve.

Deciding how much to borrow

Naturally, you need to have a well-thought-out idea of just how much money you want to ask for before you approach a lender. You’ll also need to justify the requested amount by showing the funding company the return on investment. (ROI) in your pro forma financials or business plan.

The business plan will describe the elements about the company and management team that will make sure the firm can achieve the target ROI. Draw upon research, along with your expertise in the industry, to project a budget that outlines how much money you believe will be required to start, continue, or complete any necessary projects and provide documentation that backs up your projection.

Ask for more than you've estimated will be necessary. Inevitably, surprises and setbacks will occur during the pre-launch phase of the project and you'll need extra capital to see it through. Request an amount that provides enough cushion in case of cost overruns. After all, most companies lose money during their first year of operation, and even well-run projects can find themselves over budget for reasons impossible to predict. Estimate the firm's burn rate (the amount of money spent each month on costs) and determine how long you can realistically afford to stay in business before you need to turn a profit.

Identify Sources of Small Business Funding

Some entrepreneurs are fortunate enough to have money that they can use to self-fund a new business effort. In such cases, these business owners can cover startup costs without asking for any money from outside sources.

For everyone else, financing will be required. And there are essentially two types of financing.

Equity Financing

Equity financing is the act of selling a percentage of a company’s ownership to investors. This can be done at any stage of a business’s lifespan, from start-up to bankruptcy. If an investor pays $100,000 for 50% of your company, you are no longer the sole owner, but you do have $100,000 that you won’t need to pay back. There are two main types of equity financing.

Friends and Family

Countless firms are started by people who ask their family and friends to put up money to fund a business venture. Many times, the lenders are willing to provide the money with little or no interest. But be warned. There is an inherent risk of strained family relationships and loss of friendship if the business fails and the money is not repaid. Think long and hard about what it’d mean to be business partners with your parent, spouse, or best friend.

Venture Capital

Entrepreneurs who do not have a network of family and friends willing to put up capital often look to venture capitalists who will put up the cash in exchange for a percentage of the company. It works essentially the same way as friends and family financing, but without the personal ties. The hit TV show Shark Tank has widened the understanding of this type of small business financing.

But once you have started your business it's very difficult to finance the business purely through selling shares. Most entrepreneurs will turn to other kinds of financing, specifically looking at business loans to make up the difference of what they need in order to keep their company running smoothly.

Source: Guidant Financial