Small Business Financing - Part I

Small business financing is a tough issue, especially knowing how many businesses will never succeed. Starting your own business often means quitting your job and thus losing a regular salary and benefits. You will need capital for overhead expenditures, and initial expenses will often be significantly higher than your regular monthly overhead.


Ideally, of course, you will draw on your savings to get off the ground. And you will be able to do that without using up your six-month emergency fund, cashing in your retirement savings, or using the equity in your house. Those three are the most common sources for self-financing, and a bad idea.

You need your emergency fund. Starting a business does not qualify as an emergency, though losing a paycheck is. So you may need that money for living expenses while your business gets off the ground. (And if you have a savings account but no emergency fund, then that's just semantics - your savings account is your emergency fund.) Your retirement savings are for retirement - period. This is true especially if you're young - retirement may seem like a long way off, but you also need to save more than you think. Use an online calculator if you are having a hard time seeing the long-term picture. You do not want to be in the habit of using your IRA or 401(k) like a savings account. Finally, if you've paid attention to all the news about sub-prime loans, you already know the importance of having an equity cushion in your house. If that's not enough discouragement - are you willing to bet your house on your business? Do your spouse and children agree?

Hopefully I have convinced you that there are certain forms of "financing" that you just shouldn't touch. Unfortunately, the savings rate in the United States is abysmal, and only a small percentage of people have an adequate emergency fund. So there is a good chance that anyone starting a business will need some financial help.

The average small business owner - or, especially, the average start-up - will not be able to call on private equity. Your spouse may only put up with a single-paycheck lifestyle for a few months, if you can even afford that. (Or if you're single like me, you're on your own!) And the unfortunate reality is, you will not make a lot of money right away. It could take years to break even.

This series of articles will examine some options for financing available to small business owners, and discuss the pros and cons of each. Obviously, the right option for your business will depend on your special situation. You will need to think about each option in the constraints of your resources available, lifestyle, and type of business. And when you're ready to get more information, you can reach me at www.emilyfingerlaw.com.