Small business finance is very much a part of “growing up” for many small business owners. If you are planning on starting your own business, small business finance may be one of the first things you should consider. Small business finance can literally go a long way toward helping you get your business off the ground. Unfortunately, there are so many myths and misunderstandings about small business finance that many entrepreneurs avoid this important step. By becoming aware of the common misconceptions and speaking with experienced finance professionals, you can avoid such pitfalls.
One of the most common misconceptions about small business finance is that it involves accounts receivable, inventory or short-term loans. While all three of these items may play an important role in your company’s finances, they are not the only things you need to consider. Accounts receivable represents the money an investor receives from a customer as the result of sales. Inventory is a lump sum of purchases from customers, as well as the amount of money an employee liquidates their accounts receivable after a sell order or trade. And, of course, short-term loans like credit cards carry interest and must be repaid along with a corresponding monthly payment. Understanding which types of small business finance are right for your company will help you make the right decisions.
Perhaps the largest misconception about small business finances is that they are solely concerned with documenting financial transactions, such as sales and purchases. This is simply not true. Small business owners should consider investing in some type of accounting software, as well as a bookkeeping program that will allow them to track income and expenses on a daily basis. These types of products are relatively inexpensive and, in many cases, can provide the functionality of a full-featured accounting program. Also, it is often beneficial for small business owners to use the same software that their larger corporation utilizes. This allows them to receive assistance when it comes to understanding the different ways their business is currently performing financially.
Another common misconception is that business finance consists simply of bank accounts and monthly cash statements. While this certainly is an important aspect of small businesses, there are other aspects to consider besides their balance sheet. One way to ensure that you are getting the best return on your investment is to understand how to properly calculate your returns on investment (ROI). Calculating the effect that diversification across asset classes has on a given portfolio is crucial to seeing a high return on your small business finance investments.
Small business finance also includes working capital loans, debt financing, and merchant financing. Working capital loans are designed to provide short-term cash to assist in operating expenses until the cash is needed elsewhere, such as in debt consolidation. Debt financing is used to obtain credit for a business as well as to implement a more aggressive marketing strategy. Finally, merchant financing involves securing bank loans to purchase supplies, equipment, and employee payroll.
While most people associate financing businesses with banks, there are several alternatives to banks that can provide critical funding for your company. The most popular alternative by far is debt financing. Debt financing allows entrepreneurs to obtain a line of credit based on their future credit card sales. An equity financing loan or lease also allows entrepreneurs to obtain long-term funding without repayment for years to come. As you can see, there are several different options available to entrepreneurs looking to raise money for their businesses, including traditional bank loans and equity financing.
