How to Fund Your Small Business and Manage Finances 2021

small business finances

This is why there are so many different kinds of business loans available, and why you should do substantial research and groundwork before pursuing a certain financing option. Managing the finances of your small business shouldn’t be an afterthought. If your business is to survive past the five-year mark, when 50 percent of UK small businesses have already failed, it must become a fundamental part of your strategy. The wonderful thing about small business grants is that you don’t have to pay the money back.

small business finances

You need to keep a constant eye on the situation and take steps to prevent debt from snowballing out of control. Unfortunately, running your own business comes with a number of time-consuming but unavoidable bookkeeping, tax and accounting tasks. If you have trouble getting a traditional business loan, you should look into SBA-guaranteed loans. When a bank thinks your business is too risky to lend money to, the U.S. Small Business Administration (SBA) can agree to guarantee your loan. That way, the bank has less risk and is more willing to give your business a loan.

Want to get finances under control in your small business?

There are multiple types of SBA loans available, including SBA 7(a) loans, SBA 504 loans and SBA microloans. The most popular of the SBA loan programs, 7(a) loans can be used for a wide variety of purposes and are available in amounts up to $5 million. Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. The top companies in the world have business plans that extend for decades, so emulate that strategic thinking yourself. If you know which loan matches your needs, it’s time to get to work.

With the double-entry system, every transaction is entered into your books twice. It’s more complicated than single entry, but it provides more information about your business. Unlike single entry, double-entry bookkeeping tracks your assets and liabilities in addition to revenue and expenses and has the checks and balances needed to reduce errors.

Research some of them to get a sense of how they’re pricing their items. You might want to offer a lower price than your competition to attract more customers, or you may want to use your brand to elevate the value of your product over theirs. A credit card is a great way to build your business’s credit rating, giving you a better chance of securing loans and low interest rates in the future. Having a business credit card also can give you access to rewards, fraud protection, and extended warranties on purchases. When you understand how small-business finances works, you’ll know what to do with the fish—in other words, all the money you’re making and spending. It means that knowing how to handle your finances properly gives your business a fighting chance to survive and grow.

small business finances

Like banks, credit unions offer favorable rates and loans backed by the SBA. Unlike banks, credit unions have increased their small-business lending. According to Federal Reserve data released in October 2022, lending by credit unions to small businesses increased by over 50% from 2017 to 2021 [2]. Plus, the application process isn’t easy; you may find yourself trapped under a heap of documents while you work through the appropriate forms. Just like with consumer credit cards, it’s easy to be mesmerized by big sums and bite off more than you can chew with business loans.

Set up good financial habits.

Paper can also fade over time, especially cash register receipts, and the last thing you want is to open your shoebox at tax time and find a lot of blank scraps. Waiting to organize your information every six months, or worse, yearly at tax time, is a drag. You’ll put it off until the last minute because it feels overwhelming.

Bear in mind, too, that there are many types of finance within these main categories. Depending on your financing method, you might be asked to hand over some collateral to add another layer of security to the transaction. Real estate, vehicles, equipment, or other assets will usually be suitable, but always know how much is expected of you, along with other parameters.

  1. Making sure transactions are properly assigned to accounts gives you the best view of your business and helps you extract the most helpful reports from your bookkeeping software.
  2. As your company grows, you may want to purchase more commercial real estate, acquire additional insurance policies and take out more loans to facilitate these pursuits.
  3. You can get insights by separating and analyzing segments of your business, like comparing online sales to face-to-face sales.
  4. They use their own capital, plus funds borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses.

In the accounting software, the primary journal entry for total payroll is a debit to the compensation account and credits cash. Cash accounting is simpler to track because transactions are recorded when payment is received or made. There’s no need to track accounts receivable or payable, and you always have a clear idea of exactly how much money you have. The first, and easiest, thing to do for your business’ financial well-being is separate your finances.

Small business finance FAQ

These tools will give you an idea of how much you’ll need to ask for, and will help the bank know they’re making a smart choice by giving you a loan. Otherwise known as bootstrapping, self-funding lets you leverage your own financial resources to support your business. Self-funding can come in the form of turning to family and friends for capital, using your savings accounts, or even tapping into your 401(k). Consider using one of the best bookkeeping services to make managing your books a breeze. Net profit margin tells you how much income your business is bringing in after expenses and gives you a picture of the overall profitability of your business. It’s a way of factoring all of the other expenses your business incurs into the cost of your product.

Why Bookkeeping Is Important for Small Businesses

This might not be your first loan, and it likely won’t be your last. Think like a chess grandmaster and plan your moves out long in advance. It also requires some extra transparency on your end to ensure that all bases are covered with customers.

If your net profit is low, you might need either to decrease your operating expenses or increase the cost of your product. An income statement takes a closer look at—you guessed it—your business’ income, breaking it down into expenses and revenue, then further breaking those amounts down into individual line items. Financial statements might seem intimidating at first, but once you get a handle on them you’ll love the peace of mind that comes with having a strong grasp of your business’ finances. A great way to get recommendations for CPAs is by asking other business owners you know and trust in your industry. Make sure to talk to the CPA one-on-one to get a sense of whether or not they’re the right CPA for you.

We’ve put together this guide to help you understand the basics of small business bookkeeping. A balance sheet is a snapshot overview of your finances at any given point in time. It looks something like the online banking dashboard page, but instead of showing your checking and savings accounts, intrinsic value of preferred stock the snapshot shows your company’s assets, liabilities, and equity. That said, even if you plan to keep your own books, it’s a good idea to consult a CPA before you start. It’s possible to make errors with even the simplest bookkeeping, and those errors could cost you at tax time.

Equally, if you just make the minimum payments every month, you can create a debt that’s difficult to clear. However, use it sparingly and responsibly and a credit card can be a useful tool to boost your cashflow and make occasional business payments. There are numerous business funding options available to you depending on the nature of your business and the particular challenges you face or the opportunities you want to capitalise on. Debt is undoubtedly a useful tool when starting and growing your small business, and in reality, the vast majority of small businesses will rely on debt financing of some type. However, there’s a fine line between having debts that you can manage and debts that are spiraling out of control. Sometimes, all it takes is a single event such as a market downturn, a late payment from a customer or a dip in sales to tip the balance.