How Can I Finance My Business?
For many entrepreneurs, their own savings won’t be enough capital to successfully fund their business over the long term. There are several options open to eager entrepreneurs who need financial backing, though each has its own benefits and pitfalls.
Personal Savings
Nearly all entrepreneurs must be ready to put a portion of their own savings towards the success of their idea. Hey, if you’re not willing to put your own money towards it, why should anyone else?
Friends and Family
Friends and family are significant contributors to many small business ventures; in fact, 42 percent of the funding for small businesses comes from a family member. While asking your aunt or old college roommate for a loan might seem convenient since you don’t have to go through all the red tape at the bank, finances can often strain otherwise strong friendships and family ties. Consider the emotional issues involved in the relationship and its length before asking a close friend or family member for a loan.
Loans
Loans from commercial banks are another important financing option for small businesses. Be aware that it may be hard to secure these loans if you’re a home-based or smaller business. Be sure to look for lesser-known loans in your local community, such as loans for minority groups, microenterprises, or specific types of businesses. The U.S. Government’s Small Business Association is a government source of loans for start-ups. Real estate financing through loans is another popular debt equity option for small businesses. Accounts Receivable and Inventory Financing is a collateral-based type of lending, where businesses can secure short term loans by putting up the value of their inventory and assets.
Equity Financing
Unlike debt financing, equity financing does not have to be repaid over time with interest. Instead, investors, venture capitalists, or other businesspeople pledge an amount of money to the business in order to receive a financial share in its success. Tech firms and other businesses that expect high return on investment have an easier time finding equity financing, although certain investors do take interest in other types of small businesses. There is also the option of having a public offering and selling shares in your business. Small-business start ups may need the help of a lawyer in order to navigate the world of equity financing.
More Resources:
- Microsoft Startup Center: Find Business Capital
- How to Raise Start-Up Capital
- Small Business Association Loans & Grants
Sources:
Starting and Growing Your Small Business. (2010) Virginia Tech Cooperative Extension.