One of the most common difficulties for entrepreneurs is financing a business. Whether you want to launch a start-up or small business, money is a fundamental factor.
Although it’s an unavoidable obstacle, there are several options (some easier than others) to get you that cash.
- Loans from the Small Business Administration (SBA)
The SBA offers various programs for both start-ups and small businesses. Many of the loans are provided by local banks; however, there are some conditions/minimum requirements, depending on what type of funding you’re applying for.
These could be: a good credit score/proven track record; a business that’s 2-3 years in operation (with steady cash flow); or an investment of 30% of personal equity. But this is still a reliable option, especially if you’re in need of a significant amount of capital.
This seems to be an increasingly popular choice for start-ups in particular. Crowdfunding allows multiple people to donate to a venture, creating a single pool of investments for the business.
The amount of money you raise depends on your campaign, whether you get people excited about your business, and the ‘rewards’ you offer in return: discounts, products, etc.
Kickstarter and Indiegogo are two common choices for small businesses. Remember that crowdfunding sites are different: some require you to reach the full goal if you want to access the money raised; some charge processing fees for the cash.
- Friends & Family
This might be a first choice for some and last resort for many others. It could be the easiest or most problematic solution for your funding needs. Borrowing money from people you have personal relationships with doesn’t have to be tricky though, especially because of potential benefits like low/no-interest rates and the fact that there’s already pre-established trust there.
The key is to be honest, straightforward and still professional. Show them your business plan, draw up a written contract/agreement, and keep them updated on progress. Don’t sugarcoat the risks involved – or you’ll already be creating a breeding ground for resentment later on. If you don’t want to jeopardize any relationships, have a viable repayment strategy.
- Angel investors
An angel investor is usually a wealthy individual who backs entrepreneurs and start-ups during the early stages. They usually contribute from their own personal funds, as well as professional experience. Some provide one-time seed money, others offer ongoing financial support. Note that they might require high return on investment, or equity in the company.
Angels are usually accredited by the U.S. Securities and Exchange Commission; corporations like Google and Yahoo were helped by angel investors. Networking is crucial when looking for angel investors; resources such as AngelList, AngelSoft.net and Angel Capital Association will help you get started.
- Venture capitalists
Unlike angel investors, VCs invest others’ money, and the amount is very high – usually millions. This increases the risk and so they often expect to recover their investments within 5 years. Furthermore, many VCs want ownership or management input. Here are some excellent tips to secure venture capital funding.
Venture capitalists often focus on specific industries, and the funds come from very wealthy people, corporations, and so forth. Online directories like Pratt’s Guide to Private Equity and Venture Capital Sources are useful for finding VCs.
- Revenue-based finance (RBF)
With RBF, repayments are made through a percentage of each month’s revenue. This means that the payment amount will vary according to the business’s income.
RBFs are great for growing companies and those that need funds to increase sales – as this benefits both the investor and borrower. Additionally, it doesn’t require equity dilution (ownership stake).
However, for it to work, your business must be generating revenue and making enough to accommodate the monthly repayments.
- Bank loans
This is an obvious one, but not so simple. Banks are more likely to invest in established small businesses, which have the stability and assets to offer as collateral, than start-ups and new ventures. It’s also essential that you have a good credit history.
- Alternative sources
I came across a great list of alternative funding options. One of the most interesting ones was Kabbage, an online financing company for small businesses and consumers. It’s especially for online sellers (on Etsy, eBay, Amazon, Shopify, etc.) that require capital.
What’s interesting is that when Kabbage determines your eligibility for a loan, instead of looking at credit score and financial statements, Kabbage examines your social media accounts, online reputation, and analytics from accounts with QuickBooks, PayPal, UPS, and so forth.
– – –
How did you fund your small business or start-up? Let us know in the comments!