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Small Business Funding 101

How To Avoid Being A Startup Failure

Startup failure rates are higher than the commonly quoted percentages, notes Harvard Business School lecturer Shikar Ghosh. He puts that figure at more like 75 percent, and emphasizes there are different definitions of failure. He says the rate of total loss of assets with investors losing all their money is at 30 to 40 percent, but that failing to make projected return on investment means more than 95 percent of startups fail.

startup failure

Startups Fail for Different Reasons

Ghosh says that different startup situations fail for different reasons. Nonventure-backed startups fail more often in their first four years, because they don’t have the capital to sustain the business if the business model fails. According to studies by the U.S. Bureau of Labor Statistics and the Ewing Marion Kauffman Foundation, about 60 percent of startups last three years and 35 percent last 10 years. No matter how you look at business failure, business growth is dependent on funding.

Small Business Funding

The first funding benchmark of business creation is the seed stage, when an entrepreneur or partners explore business viability and prepare to launch operations. The next stage, startup financing, sometimes called the series A round of investment, is usually followed by the second-stage or series B round. There may also be series C and series D rounds of financing.

The next stage is a line of credit from a commercial bank for working capital, usually secured when monthly cash flow is positive or at the break-even point. When working capital no longer supports normal operations and growth, more external funding is needed to prepare for either plans to sell or make an IPO; this usually requires short-term debt, also called mezzanine or bridge financing.

startup failure

Sometimes, entrepreneurs want an alternative to external investors, preferring to bootstrap growth with internally generated funds or sources other than bank loans. They can look for alternative sources, such as selling future structured settlement payments or using peer-to-peer lending networks. Online companies such as LendingClub.com and Prosper.com enable direct lending between individuals at specific interest rates.

Crowdfunding from sources like Kickstarter, kriticalmass and Seedrs is another alternative small business funding option that’s becoming more popular. Speed funding events like those run by Angels Den in Scotland, where startups get to pitch to multiple investors in one day, are a new way angel investors are funding small businesses.

Funding Sources

Small business and entrepreneurship expert and Forbes contributor Jim Blasingame explains three primary sources of growth capital for small business: equity capital from founders or outside investors, retained earnings from operating cash flow and profits, and funds borrowed from financial institutions.

Blasingame recommends using local capital sources such as community banks and credit unions for consistent banking relationships that aren’t there with big, national banking institutions. He says relationships like this are necessary for growth as well as for consistent support, and the businesses that don’t develop them are either not growing or are doing so organically by bootstrapping with internally generated funds and growing more slowly with alternative funding sources.

Written by TeamSMF

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Small Business Funding 101 Reviewed by Nicolas At SMF on Thursday, September 04, 2014 Rating: 5
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