Inadequate financing is frequently cited as a primary reason businesses fail. Other financial reasons for failure or poor performance include miscalculating how much capital is required, underestimating the cost of borrowing, or simply securing the wrong kind of financing. Many of the resources referenced here provide access to capital and the expertise to help manage it.
The U.S. Small Business Administration suggests that managers of a small business consider these questions before pursuing financing:
Most small or growth-stage businesses use limited equity financing. Equity often comes from non-professional investors such as friends, relatives, employees, customers, or industry colleagues. However, the most common source of professional equity funding comes from venture capitalists. Venture capitalists most often prefer three-to-five-year-old companies with the potential to become major concerns and return higher-than-average profits to their shareholders.
There are many sources for debt financing. The most common are banks, savings and loans, commercial finance companies and the U.S. Small Business Administration (SBA). Oklahoma also has a number of state-level and local agencies and organizations with programs that provide debt financing and encourage the growth of small businesses.
In Oklahoma, commercial banks have been a traditional source of small business funding. But their principal role has been as a short-term lender offering demand loans, seasonal lines of credit, and loans for machinery and equipment. Banks generally have been reluctant to offer long-term loans to small firms. The SBA guaranteed lending program encourages banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available.
A business plan precisely defines the business, identifies goals, and serves as the firm’s descriptive brief. Components include a current and pro forma balance sheet, an income statement, and a cash flow analysis. The business plan addresses what service or product the business will provide and what needs it will fill; potential customers and how they will be reached. Some of the resources referenced here can help the fledgling small business owner prepare a business plan and begin the search for financing.
For an extremely useful guide on business plans and other issues that small and start-up businesses face, download our new Business Basics guide, produced by the Oklahoma Small Business Development Center and the Oklahoma Department of Commerce. And be sure to visit the Business Start-Up Frequently Asked Questions page.