Small businesses pop up every day, but only a small percentage of them actually survive. The main reason new small businesses fail is because they lack the necessary start-up funds. With a plethora of ways to raise capital, any small business should be able to find the necessary funds. There are two main sources of funding: equity and debt financing. Equity financing gives financers part ownership in the company and debt financing is any type of loan that you will have to pay back. In deciding which type of financing to use, remember that the more ownership you give away, the less revenue you will receive in the end. Also, be careful to incur any type of debt in moderation. Of course, the safest and most beneficial way to finance your small business is from personal funds if you are capable. When searching for ways to gain capital, new small business owners should explore all of their options.
– Access savings
– Sell valuable assets
– Finance from your 401(k)
– Get lucky: a few organizations or businesses offer cash awards, prize money and mini-grants for start-up companies
Equity financing requires the small business owner to find investors (public or private) and reassure them that their investment will yield a high profit margin. When asking for money, the owner needs to be prepared with a sound business plan including how much capital needs to be raised and how it will be used. Equity financing is a great option especially if more capital is needed than is available through debt financing.
Get a business partner
Team up with someone who may not have had the money-making idea, but has the money to invest in it.
Incorporate the business
The business can be taken public and shares of stocks sold either through direct public offerings or initial public offerings
Find a venture capitalist
There are many people and companies who are willing to invest varying amounts of money for a venture they believe in and that has a high growth potential. Find them through online directories, the local chamber of commerce, friends and family, trade groups, industry associations, etc. Look at federal government venture capital companies such as Small Business Investment Companies (SBICs) and Specialized Small Business Investment Companies (SSBICs).
Debt financing can be more risky than equity financing because if the company fails, the owner still has debts to pay off. However, if the business is successful, the smile on the owner’s face will be that much bigger as all of the revenue will go back to the business owner once debts are paid. Be careful of high interest rates with any debt financing and use it only in moderation.
– Borrow from friends and family
– Apply for a small business loan
– Take out a second mortgage on your home
– Borrow against insurance policies
– Put it on a credit card
– Try royalty financing
There are many types of loans available for small business owners:
Niche or specialty loans
Lenders will often have loans available that are specific to the product, service, area or characteristics of the owner.
Bank-term loans are traditional, commercial loans that are given by financial institutions. They usually require collateral, charge interest and can be either long-term or short-term.
These come from commercial finance companies (as opposed to banks). They are collateralized by the company’s assets.
The U.S. Small Business Administration guarantees certain loans that are given through banks or commercial lending institutions. They will often guarantee up to 80% of the loan principal. These loans usually do not require collateral and can be paid off from cash flow. The principals may also be longer than traditional commercial loans. Examples of these loans are:
– SBA Loan Program
– 7(a) Loan Program for businesses with special requirements such as exports to foreign countries, active duty military personnel, veterans, and business owners in rural areas.
-Microloans for non-profit, community-based organizations.
– CDC/504 Loan Program for economic development within a community by a for-profit business that fits size standards set by the SBA.
Community Development Financial Institutions (CDFIs)
These institutions provide loans to businesses that are otherwise “unbankable.” These are companies that may not qualify for a traditional loan from a bank or other lending institution because of past credit problems, limited equity or collateral, or the size of the loan they are requesting.
About the Author: Robert Cordray is a freelance writer for Income.com and expert in business and finances. With over 20 years of business experience, Robert is now retired and hopes others can benefit from his writing.