It is hard to categorize Small Business as to being one type or another. Small businesses and their owners are a very diverse group.
For example, this is true for the number of employees in a business. Number of employees is an indicator of size.
Depending on how employees are counted and the definition of such, the number of employees can range from zero up to 499.
The financing needs of a business can be vastly different based on size and other factors.
These other factors can include the maturity of the business (startups, later stage), capital requirements (does the business need vehicles? Expensive machines?), is the business growing quickly? And so on.
Startups rely on the owner’s cash and bank financing about equally. Owner’s cash includes both that of the operator and his/her relatives.
A Wells Fargo startup analysis reported that the average amount of money for a startup was around $10,000. A Kaufmann study (an organization focused on high tech startups), discovered that tech startups usually require around $80,000. However, up to 30% of startups do not require any capital at all.
For established -ongoing businesses, owner cash and bank credit are the two most widely used financing. Early-stage businesses often rely heavily on outside debt. About three-quarters of their capital is derived from loans, lines of credit, and credit cards. Outside equity sourced from angel investors (individuals) and venture capital firms is only 6% of financing.
A word about using personal credit cards. Small businesses use credit cards extensively. Though credit cards only account for a small part of total small business capital. Around 7% of all startup capital is sourced from credit cards. This is the third most popular financing source after cash flow internal to the business and bank loans.
Here is a quick view of Financing Sources for Small Business.
Small Business Loans – All Types: 51%
Finance Companies: 36%
Mezzanine & Buyouts: 9%
Angel Capital: 2%
Venture Capital: 2%
SBIR Awards: 0.3%
Small Business capital requirements differ greatly. As said earlier, a significant number of established businesses use no outside financing whatsoever.
The need for cash and capital to start a business or finance a small business depends on the type of business. Some businesses are service-oriented and otherwise require little capital. However, the time the owner commits to the business can be counted as capital – as that person can be making money doing something else (a job for example). So while the money is not directly applied to the business, there is an opportunity cost nonetheless.
This goes without saying – perhaps – but well-run businesses use capital efficiently. I’ve seen many businesses with great potential fail because of the ineffective use of their capital. And a business does not need to fail, it can just not reach its potential.
Guard your capital – it is one of your most valuable resources. Capital is always scarce. Use it wisely.
