One of the biggest challenges facing startup businesses is getting adequate financing – without hobbling future performance.
There are many options out there, but sorting through them can be difficult. It’s not just an issue of knowing where to start and what options fit best with the entrepreneur’s personal and business circumstances, cash needs and credit rating. The fact is that today’s millennial business owner is likely to be hampered coming out of the gate by poor financial literacy.
One recent study, for example, reported that only 24 percent of millennials have basic financial literacy; 8 percent have high financial literacy. As a report last year by BMO Wealth Management noted: “This lack of financial expertise may have an impact on the ability of millennials to attain the financial success they desire.”
It’s something the financial community – along with government resources, for that matter – needs to think about as it works to help young business leaders consider their financing options. The smarter they are, the better risk they will pose, making money easier for them to secure and cheaper, too.
In fact, one personal lender, SkyCap Financial, believes financial literacy is so important that it recently launched SkyCap University, a free educational course designed to help its clients improve their understanding of money management principles.
As SkyCap Financial explains, everybody should be a master at managing their finances. With subjects ranging from debt and credit to budgeting, SkyCap Financial clients finishing the program may be eligible for a lower interest rate on their loans from the company.
SkyCap Financial lends up to $10,000 in personal loans for any purpose, and personal funds, like home equity, personal savings and personal credit cards, are how many entrepreneurs capitalize their early-stage startups. In fact, according to Entrepreneur, 8 percent of entrepreneurs depend on their personal credit cards, with 3 percent using home equity loans as a financing source. A quarter of startups are founded with no capital at all, and 57 percent use personal savings.
Are those an entrepreneur’s best or only bet? Of course not. But entrepreneurs should not necessarily be guided by expediency. “The bottom line,” writes Mark Abell, an executive at NBH Bank, “is that entrepreneurs need an effective capital strategy to expand and build a business.”
Once developed, with the aid of a banker, lawyer, accountant or other resources, entrepreneurs will be in a position to weigh their financing options. Among those the Canada Business Network suggests:
Government grants and financing. Grants, contributions, subsidies and loan guarantees may be an option, depending on your business type. Public funds, for example, may be available to help you springboard your venture. And if you’re having trouble securing loans through traditional sources, a government loan guarantee might help.
Private sector financing. Lenders and investors in the private sector can be an option if you can make a case that the risks are justified by the rewards. As a startup, you will need a strong business plan and may also have to put up personal assets as collateral.
Business incubators. Not all incubators provide financing, but many do, among their other services as “one-stop” shops to support entrepreneurs through the start-up phase. These services can range from office space to technical support and general business advisors.
Crowdfunding. Online crowdfunding platforms serves as another way to help spread the word about your initiative; crowdfunding channels allow entrepreneurs to collect individual donations and even take pre-orders and fine-tune products with prospective customers and supporters.
Having an innovative idea for a business is only part of the battle to succeed with entrepreneurial ventures. Getting smart about money in general and the capital your business will need to thrive may be your bigger challenge.