Every small business needs funds to get started or to expand the existing business. Funding small business can be a challenge to any entrepreneur in terms of a reliable source, time and money. Financing options for a small business are many but an entrepreneur needs to find the right funding.
Small business has many sources from which it can be funded. For instance entrepreneur’s self-finance(including assets), bank loan, angel investors, finance companies, grants from government. Different kinds of tools are available to discover funding options, loan experts, bank loans to decide which suites the best. Any small business which intends to raise money should have a clear understanding of its type of business, a business plan which carries the details of sales, money inflow, operational details. Sometimes it can be difficult for a start up business to approach for bank loans as there may not be any operational history to show and acquire a bank loan. At that point of time, self-financing i.e own financial contribution proves the best choice of small business funding. Two kinds of money exists namely debt and equity. Read on to find out the different ways in which funding for small business can be proposed.
Debt financing means raising funds by borrowing money from financial institutions like banks. Banks provide loans or credit based the financial position of the business- sales, revenue, collateral and liquidity of assets. Industries like retail, restaurants, manufacturing are not attractive to lend money due to the risk involved. Small businesses need to establish a good personal banking experience as it will help banks make lending decisions quicker and favorable. Debt financing is available to businesses that cannot avail equity funding.
Grants are free money provided by the government to start a business. They also include guidance and mentoring from established business men. Small businesses who wish to avail grants need to have their business plan prepared as it will be scrutinized for feasibility, market behavior and location. Small business start up grants have cumbersome procedures and are given with instructions on how to use the funds for business.
Equity financing means raising funds in exchange for equity shares(ownership in the business). This form of finance is raised from family and friends, angel investors and venture capitalists.
Family and Friends
One of easiest and hassle free source of getting money to invest in business. However the risk involved needs to be clearly conveyed to avoid resentment later. They must be prepared to loose 100% of the money if business is not successful.
Angel investors are rich individual investors. Their role in the process of funding comes in the initial stages of a start up business. These investors are also source of contacts and advice. If an angel investor refuses to invest in a small business, he may refer similar angel investors who might show interest in that particular business. Small businesses can also approach angel groups for finance as they provide funds as a group collectively.
Venture capital funds
Small businesses can propose to raise funds from venture capitalists when their businesses have been passed the initial start up funding stage and achieved business stability in terms of traffic , sales or cash inflow. These are companies that invest other people’s money in large amounts. Venture capital comes with a lot of constraints like restrictions on the money investment, sharing control over the business and exit strategy.