The COVID-19 pandemic has significantly and negatively altered the financial health of the world’s economy. Individuals in various countries have been hit hard, with quite a number of people losing their jobs and businesses. Losing jobs and businesses means that people have lost their source of income and, yet, it is that time when people seriously need these finances to survive. Starting businesses during this time has been extremely difficult with most lending institutions, like banks, toughening up their lending terms.
It is at this time that as an entrepreneur, you would need institutions with fast approval loans to help cushion yourself against the effects of this pandemic. Much as you are looking for these kinds of loans, here are 4 important things that you need to know about entrepreneurship finance.
1. Consider Your Collateral and Personal Credit
According to the Federal Reserve Survey, nearly a quarter of small businesses and more than half of sole proprietorships below five years have to personally guarantee their debts. Most of the capital that these start-ups will have will be from the owners’ savings or the owner will guarantee a debt with their private assets. The lenders are, therefore, less interested in your business, but rather with the collateral you can place against your debt and your credit rating. This, thus, means that for you to raise good capital from these lenders, you must have valuable assets as well as a favorable credit rating. Otherwise, you will find it difficult to get any financing. Ensure that you always have a positive credit rating.
2. You Are More Likely to Get a Loan Than an Equity
While there are lucky start-ups that get equity financing, most small businesses get loans in the form of debt. Equity means having angel investors buy a stake in your business even before it starts running. The angel investors become shareholders in your business and are entitled to an agreed-upon share of profit. If the business fails or makes a loss, they also share in that loss. The business has no obligation to repay that money as debt, but has to see that the venture capitalist gets value for their investment; otherwise, they can withdraw their funding by liquidating the business.
Studies show that very few businesses get such financing. About only one percent receive financing from both angel investors and venture capitalists. Not unless you have a very novel idea that such lenders see as a sure bet, then your probable source of financing will be a loan from lending institutions. Even cash from friends and family is more likely to be a debt than an investment. So, you should be prepared to raise most of your capital when setting up your business.
3. Develop a Less-Capital-Intensive Start-up and Grow It
Most successful businesses started from scratch and grew with time. You will often hear stories about how a multinational company began from a basement or a garage. The hard truth is that you will have to start yours as such too, not unless you find a very generous financier. If you already have hard assets that you can stake for a big loan, then you can go for that if you are sure about your business idea. Otherwise, it is better to develop a less-capital-intensive business idea, then start it with minimal resources without staking too much debt, and let the business grow with its returns.
Investors are likely to put money in an existing business that they can see some records than an idea that is still on trial. So, raise that capital, start it small, and grow it with time, then you will attract the venture capitalists. You should avoid putting your hard assets to the mercies of lenders until the business is up and running and can see its trajectory.
4. Avoid Putting Lots of Cash on Inventory
Every single dollar that you put on your inventory corresponds to a dollar less in cash. This money will not be part of the profit and loss account if you have not yet sold them. Once you sell the goods, it becomes part of the cost of goods sold. Keep in mind that what is in the inventory is not in your bank as cash. If you fail to sell those goods on time, you could be cash tied and choke the business. It is important that when starting up a business that involves selling goods, you avoid tying up your entire running capital and instead balance on sales and inventory.
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