Funding Small Business
It takes money to make money. We have all heard that phrase consistently throughout our life. That concept has been around as long as trade has been around. Even a cave man would eventually stumble upon this concept if he traded tools or food for something he desired that belonged to another.
|Small business loans help fund new business opportunities|
If you want to start a business you must figure out how to fund it. You need to find capital to get started and start making money.
Here I explain and list almost every small business funding outlet available to today’s entrepreneur.
You and Yours
The first and least expensive outlet to raise capital is from yourself. You don’t have to pay interest to yourself.
Also, you can use personal credit which will cost some. This is arguably not using your money though and perhaps better belongs under another banking outlet in the list below.
Don’t forget about friends and family. This can be a great place to raise capital. However, exercise good judgment. Don’t borrow from those who can’t afford to lose it. Also, realize that a great many families and friendships have ended over such loans like these.
Another for of funding could be free labor. You can put time and effort into your business without running up payroll a dime. Perhaps you can convince friends and family to do the same.
If you already have a decent business and need financing to expand your business, you may want to consider asking existing customers to invest. These are obviously folks who see the value in your products and services. Perhaps they are looking for places to invest. Another benefit is that you may be able to pay part or all of what you will owe them in goods and services which are cash value to them but discounted for you. It is a win-win situation in the right scenario.
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Small business loans from banks can be difficult to obtain for those who are just starting out. Banks typically lend to established businesses with proven track records and plenty of collateral. Even if you are able to get one the bank will most likely try to get you to personally guarantee the loan which at that point makes it a personal loan, not a bank loan.
On the positive side if you are able to get legitimate business financing the interest rates will most likely be low compared to other forms of funding a business.
If you decide to pursue a bank loan there are a few tips that will increase your chance of success. Small community banks are more likely to fund small business loans. Make sure you have a business plan. Be prepared to sell yourself. Also, have answers to what the money will be used for and how that investment will yield an adequate return to pay back the loan.
Banking Credit Lines
Sometimes a line of credit can be a better option for small businesses that won’t need the money all at once. Banks are more willing to give you a line of credit than a large lump sum loan. It makes more sense for you if you don’t need it all up front because you only pay interest on what you are borrowing. The bank is happy because the interest rates are higher and they are also able to monitor your behavior. Be careful though because this credit line can be taken away at a moments notice.
The Small Business Administration is a Government agency created to help and encourage US small businesses. Many folks who are unable to get a loan through a bank can get a loan comparable through the SBA. This is because the SBA will act as a co-signer and guarantee a portion or all of the loan. This is great but will add some expenses to the process.
Alternative Online Short Term Funding Loans – Credit Line
There are a few online business lenders that provide short-term bridge loans to established and proven businesses. These loans act as a short-term line of credit. Typically less than a year. The interest and fees can be quite high so caution and prudence are required to successfully leverage this sort of financing.
If you are curious to take a look at OnDeck.com
Peer to Peer Loans Online
There are many sites such as Prosper.com where you can get unsecured personal and business loans funded by the users who lend in small $25 increments to large 1000’s increments. For example, if you request a 5,000 dollar loan you may be funded by 100 individuals that make up one loan bundled and serviced by prospering. Interest rates can be high and there are fees.
Micro Financing for Small US Businesses
When most people here the term “micro-financing” they think of tiny 20$ loans made to folks in developing countries. However, micro financing exists here in the US as well and its more than enough for a few goats. These loans are for small businesses that just need 7,000 – 20,000. These are very small compared to the typical business loans made by banks. Typical bank loans are at least 100,000’s and often millions.
These micro business loans are obtained through nonprofit business help organizations such as the SBA.
Merchant Cash Advance
This source of business funding appears to have originated from the same schools of thought as loan shark mobsters have utilized. Funding such as this should only be used for short-term needs and only when there are no options and desperate needs.
Merchant cash advances are easy for businesses with significant monthly credit card sales. The funding approval requires no collateral and no credit history reviews.
Here is how it works.
First, the lender advances said the amount of cash and charges fees but typically no interest. Instead of interest, you agree to give the merchant a portion of your daily card sales revenue until the fees and loan have been paid in full. It can get expensive.
Finding investors to put up capital is a great way to fund your business idea. Just like any form of financing it comes with its pro’s and cons.
Obtaining investor capital is great because the business does not have to pay interest and there is no financial risk. If the business fails you nor the business owes anything.
On the other hand, the investor buys a share of the fruits. Part of your business won’t be your business if the investor has “purchased equity”. Even further if part of the business belongs to someone else then they arguably have some say in regards to what business actions, strategies, direction, etc are carried out. Thus you lose control of at least some of the decision-making power.
You can, however, protect your control by creating the proper investor agreements and offerings.
Also, consider that having others with some skin in the game can be a good thing. The investors have a great deal to gain and likewise a great deal to loose just as you do. Thus if a smart investor agreement is made between folks that get along and share a common business goal having investors can be a magical thing.
If you have a big, new, and highly profitable business idea that has the potential to take off and make you and those around you rich then you may want to pursue funding from venture capitalists. These investors look for big returns in relatively short periods of time. They relentlessly search for opportunities to buy in or buy out businesses that offer opportunities for big profits. They also try to create multiple exit plans for different scenarios. They almost always seek huge control with their purchases.
One of the great things for the entrepreneur with the big idea is that these investors will basically guarantee you wealth immediately. On the other side, you may not like how things are ran and could even get pushed out of the circle of company control.
These are investors who seek to not only invest in a new start-up company but also want to help with the start-up process. They can bring a lot of business experience and wisdom to the table as well as a lot of business connections that may prove incredibly valuable to someone less seasoned just starting out in the business world. Angel investors can provide some much-needed business help to novice business owners just getting their feet wet for the first time.
Online Crowdfunding Capital Investment
Crowdfunding is a very interesting way for a small business just starting out to obtain the money they need to launch their new business. It works in a similar fashion to peer to peer lending except for the folks funding the business are not loaning the money they are investing the money. Kinda. There are two different types; “Reward Based” and “Equity Based”.
The most common type is Reward Based Crowdfunding. In return for a individuals contribution the company will reward them with some sort of gift, perk, privilege, etc. On the other side is Equity Based Crowdfunding in which the contributor is given an actual stake in the new business. This latter option has regulated limitations as to how much can be invested by an individual.
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