Starting a small business can be a difficult task, especially when there are little or no sources of finance. Although bank loans have been the most common source of financing for small businesses, it is not the only one.
As a small business owner, it is best to diversify your sources of financing. This will help you get the appropriate financing that meets your specific needs. In this article, you will not only find the different sources of financing small businesses but also decide the best source of commercial financing for your business.
Financing Small Businesses
Financing a small business is one of the most important aspects of starting a business. Although self-financing is the best source of financing, most entrepreneurs find it difficult to raise the start-up capital on their own; hence they opt for other alternatives. Unfortunately, most entrepreneurs end up choosing the wrong financing source for their business. To help you avoid making the wrong choice, we have listed some of the best sources of financing for your small business.
Bank Loans
Every bank has a department that provides loans to small companies; however, such a company must meet the minimum requirements for obtaining the loan. These requirements and criteria differ for each bank. The advantages of obtaining a bank loan also differ for every bank.
Therefore, before you decide on which bank to get your loan from, it is vital to check out the types of loans they offer. You also check their terms, whether they offer working capital loans or loans against property. This will help you determine the bank that best meets your specific needs.
Asides from having a good business idea, you must also have a solid business plan in place. You must also have at least a personal guarantee among the entrepreneurs. This is because bankers only attend to reliable companies with good credit.
Business Grants
To help small business owners find their bearing, a lot of organizations are known for supporting small businesses with business grants. Although you’re not expected to pay back a business grant, nothing good comes free; hence it may not be easy to get. Nevertheless, with time and devoted effort, you will eventually find one that suits your business.
Private Equity Firms
A private equity firm is an investment management company that is dedicated to investing in the private equity of a small company. The aim of this is to provide financial support to such a company. They raise funds through different affiliated investment strategies like venture capital and, in turn, invest in buying the capital of promising small businesses.
The major challenge of getting such a fund is that the entrepreneur may lose the proprietorship of the company. This is because the private equity firm gets an influential position in the company and finds ways to increase the value of its investment. Eventually, this may lead to conflict.
Small Business Loans
In every country, some institutions provide loans to small businesses only. In the USA, SBA is an example of such an institution. Small business loans aim at lending capital to small companies who, for one or more genuine reasons, have been unable to get financing for their businesses.
Family and Friends
No law forbids getting a loan from your friends and family members, as long as they’re willing to lend you. In some cases, they may give you the capital in exchange for an equity stake in the company. This type of fund is called love money and should never be taken for granted.
Angels
Some individuals are generally wealthy and willing to help small businesses. These individuals are regarded as Angels. Sometimes, they are leaders in a particular industry who decide to help starters with their finance, experience, network, and management know-how. They often fund small businesses with investments that range from $25,000 to $100,000.
Personal Savings
This is the easiest source of financing for a small business. The only risk involved is the risk of the business not going as planned. The entrepreneur can raise capital by either selling or taking a loan on assets like real estate, stocks, mutual funds, jewelry, and other personal belongings. Personal savings should always be the first go-to source of financing your small business. This proves that you have a long-term commitment to such a business.
Factors to Consider When Choosing a source of Financing a Small Business
Although there are many sources of financing for a small business, not all are suitable for you. Therefore, before you choose any of the sources of finance for your business, take your time to consider the factors below.
Cost
It is important to consider the cost of choosing a particular source of finance for your business. As much as possible, a small business owner must strive to cut down unnecessary costs that don’t add to the growth of the company.
Ultimately, your focus should be on the option with the least possible cost. A great example is a grant which does not involve interest.
Risk
Risk is another crucial factor to consider, especially for a small startup business. What happens if the business plan doesn’t go as planned and you’re unable to repay the money? Will you be jailed? Will you jeopardize a good relationship? Questions like these will help you decide whether or not to go for a particular source of finance. As a small business owner, you must ensure you minimize risk at all costs.
Long-term Or Short-term Borrowing
Before you decide on the source of finance, you must consider whether to get long or short-term funding. While long-term finance is usually repaid over a long period, short-term finance is paid over a short period. Where you source for finance should depend on when you plan to repay. For example, if you plan on getting a long-term loan, you can consider a bank loan instead of asking friends and family.
In conclusion, when it comes to financial solutions for businesses, there is no perfect option. What works for you may not work for another person. Hence, you must carefully go through the options and decide what works best for you and your type of business. However, ensure you think outside the box and consider the future of your business as you make your choice.