How to Finance a Small Business

How to Finance a Small Business      

Millions of people start small businesses every year. While industries vary, almost all founders are faced with the same issue: financing their business. This article addresses ways to fund a startup, which include savings, angel investors, venture capital, credit cards, and cash advances among others.

Savings

Using your savings is the easiest and safest way to fund a small business. An obvious limiting factor here is the amount of money you can or have been able to save. Since your savings depend on your income and expenses, the former must considerably exceed the latter.

Angel Investors

An angel investor is a high-net-worth individual or a small group of people who invest by buying equity in a business. They can provide expertise, money, and guidance to help launch and develop a business. To get money from an angel investor, you must convince them of your business’ potential for growth. You will also need an exit strategy – a liquidity event that makes it possible for the investor to get returns. This is usually done by selling or listing the company publicly.

Credit Cards

You can use credit cards to pay vendors and often earn rewards, discounts, and some forms of protection. However, you also need a good credit score to utilize this option. Most credit card companies charge high rates on their cash advances, making them an expensive alternative. Therefore, they can be useful as a last resort.

A Loan from the Small Business Administration

A loan can help get your business off the ground. Small Business Administration (SBA) offers small business founders loans of up to $50,000. The loans are provided by intermediaries of the organization, who also offer management assistance.

Relatives and Friends

Many startup founders convince relatives or friends to invest in their initiative. You can ask someone for a business loan or for an equity investment, which involves selling part of your company. However, when borrowing money from friends and relatives, there’s always the risk of compromising your relationship if the business goes under. Therefore, you will need to decide for yourself if such a risk is worth taking.

Business Loans

You can apply for a business loan from a bank, but keep in mind these aren’t easy to get. Traditional financing institutions such as banks typically only provide financing if your business generates cash flow and disposes of significant assets.

Debt and Equity

Debt and equity are the two basic ways to fund a small business. Debt financing is a credit line or loan that gives you a set amount of money that you must pay back over a given term. Assets are used to secure most loans, meaning the loan provider can take them away if you default on payments. An alternative to this setup is an unsecured loan, where there is no specific asset.

If you choose equity financing, you’re effectively selling a part of your business. Accordingly, the new owner will get all voting rights, benefits, and cash flow connected to their newly acquired share.

What if I Can’t Finance my Small Business?

Your inability to obtain financing is no reason to give up on your hopes and dreams! You can launch a business or activity without a startup cost, such as being a virtual assistant. A virtual or personal assistant performs many front-desk or secretarial functions without actually being at a business’ physical location. You will be working for different clients from home, making flight arrangements, and keeping track of calendars.

You could also generate revenue by becoming a product reviewer. This is a job that partially overlaps with content writing, where you write product reviews and get paid per review or by the hour. As a bonus, you get hands-on experience with new products, such as using modern tech, reading new books, and trying new gadgets.

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