Owning a small business, whether you’re new or a veteran to the business world, can be difficult. With so much on your plate each and every day, and various departments to oversee, it can be a little overwhelming to dedicate time to each and every business entity.
Finance is a common area that many first-time small business owners have difficulty managing. While you may know your product or service and your customer or client base, the financial aspects of running a small business can be downright difficult to understand.
If you feel like financing terms and other lingo used in the business world is slightly over your head, you’re not alone. This guide can help you to understand those critical financing terms so you can communicate clearly and gain a better internal, financial understanding of your business.
Business plan is one of those financing terms you’ve probably heard before, but when you’re trying to get a small business off the ground, it can take on a much deeper meaning. When discussing a business plan, there are some key points you need to keep in mind.
- Education history of business owner and principals
- Work experience of business owner and principals
- Relevant personal experience of business owner and principals
- Detailed credit history for owners and principals
- Financial statements for owners and principals
- Cash flow projection for at least one year
Start-up loans are a type of loan given to a small business to begin operating. While the size of a start-up loan can vary based on the type of business, this money usually goes to secure a primary office or retail location and any expenses incurred, like business equipment, office fixtures, or software.
Typically, start-up loans can be challenging to get if you don’t have a proven track record in the small business world. A well-prepared business plan is the vital first step in the process.
Growth loans are generally given to small businesses that have already secured the capital to begin building a company. In many cases, the money to build the business comes directly from the owners and/or the principals. Many small business owners also seek informal loans from outside investors, friends and even family members who want to help out and hope for a return on their investment.
Generally, these loans are given to small businesses that are already earning in their area and need money to continue their upward growth. A way to repay this money is essential however, and personal collateral and funds are often looked at, as well as the credit score of the owner or principals applying for the loan.
Financing terms can be confusing for the average small business owner, and while the aforementioned ones are relatively broad, knowing them should help you seek the right type of capital for your business. While you can use your own money, chances are you don’t have enough to really help your business grow the right way.
There’s also no reason to put all of your financial security in jeopardy if you don’t have to. That’s your money that you’ve worked hard for, and it’s much better to use it as collateral or proof that you can turn a profit than to simply use it to pay the rent for your office or retail space.