The Alliance of American Football (AAF) was a new spring football league that opened its season one week after the 2019 NFL championship game. Years in the making, the league showed plenty of promise in its first few weeks. Then things completely changed overnight. The league folded after just eight weeks, not even completing its inaugural season. The AAF is a shining example of why start up business loans are so critical to small business.
During the media autopsy performed on the AAF in the weeks following its collapse, it was discovered that the company behind the league was in financial trouble early on. The company had promised all of its employees – including players and coaches – that it had enough funding to play for three seasons without any financial worries. It wasn’t true.
The league was apparently in desperate search of new investors before the first game of the season. When they finally found a wealthy investor willing to infuse some $250 million, they thought the league was safe. They granted that investor complete control over everything. He determined the league was a losing proposition and pulled the plug.
The Purpose of Loans
Fans of the AAF are obviously disappointed that the league did not survive. But they are also angry that it closed down so abruptly at the hands of a single investor. Had the league secured appropriate business loans to get through their first three seasons, perhaps they would not have had to lean so heavily on a single investor who ultimately decided to bail.
Indeed, that is what start-up business loans are for. They are intended to provide new business owners with sufficient funding to get to the point of at least being self-sufficient. Some start-up loans are used to finance equipment and supplies. Others might cover payroll for a set amount of time. Regardless of their purpose, the one thing they all have in common is that they provide the necessary cash flow to keep a business afloat until it has enough revenue coming in to pay its bills.
Lack of Funding and Business Failure
You could argue that a lack of sufficient funding is the number one reason small businesses fail. In some cases, the failure is direct and obvious. A start-up opens its doors with a minimal amount of funding in hopes that revenues will be there quickly. When those revenues do not materialise, they cannot pay their bills. Shutting down in bankruptcy ends up being the only option.
In other cases, the failure is indirect. A start-up begins without sufficient funding and must, therefore, limit its own expenditures in order to keep things in the black. But limited expenditures mean limited payroll, limited marketing, and so forth. The company ends up defeating itself because it doesn’t have the finances to put into winning customers and growing the business. Eventually, it fails because the business requires too much work without sufficient reward.
Start-Up Funding Is Not Optional
Start-up business loans are optional in the sense that there are other ways to acquire funding. Angel investment, crowdfunding, and even contributions from family members and friends could theoretically provide enough funding to get through three years. But whether it is business loans or alternative financing options, start-up funding itself is not optional.
You have to spend money to make money. Any sound business owner can tell you that. Every new start-up needs at least one funding source. Most of the time multiple sources are required. The point here is to look at start-up loans as one component in a well-designed funding strategy. In other words, do not rely exclusively on business loans to keep your operation funded. Otherwise, you could weigh your business down with unnecessarily expensive debt. By the same token, you do not want to rely exclusively on some other source either.
An ideal financing strategy would be one that looks a lot like investing in its diversification. Some of the financing come from business loans, some of it comes from interested investors, and the rest comes from personal resources and contributions from other individuals who want to help the start-up succeed. A diversified strategy supported by enough funding sources can keep a business going while ownership grows it into a profitable venture.
And now you know why start-up business loans are so critical. Do not let your start-up be the next AAF.
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