There are four main reasons Small Businesses need financing, and to take on debt.
There are variances within these four reasons.
But most of the time the reason can be put under one of these categories.
The four main reasons are:
1) Starting a business. Some types of businesses are more expensive to start than others. Service businesses that do not require specialized equipment are less capital-intensive than ones that do require such investment.
3) Expanding the business to capture new opportunities. Sometimes an opportunity will present itself and the businesses cannot take advantage of the situation without additional capital.
4) Strengthening the financial position of the company. Capital is often needed for working capital purposes when revenues are increasing.
Regarding startups/early-stage companies – The Kauffman Foundation (a non-profit that studies startups) says that one-half to two-thirds of early-stage businesses utilize capital injections. As said in an earlier post, this can come from both owner-supplied and non-bank sources. Correspondingly, Census data report that less than half of early-stage companies seek expansion financing.
No matter the number of businesses seeking outside financing, many very high-growth companies (job creators) require financing to grow quickly.
A major consideration is that when bringing capital into your firm, only take what is needed. Do not over-capitalize. That situation has its own set of issues that I will discuss in another post.
