Financing: Overview of Options

We have all read about businesses funded by venture capital firms or wildly successful Kickstarter campaigns. These stories make great headlines, but they don’t reflect the reality most people face when trying to fund a business. Here are the most common ways to raise money for your small business:

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Self

It is very common for entrepreneurs and small business owners to use personal assets and credit cards to pay business startup or expansion costs. This is known as self-funding or bootstrapping.

As a first step, identify what assets you have, from what’s in your bank account to what’s in your attic. Decide what you’ll tap into and under what circumstances. You might need to scale back your project or find ways to increase your income if funds fall short.

Putting your own net worth and credit score on the line shows investors you’re serious about the business and have an interest in avoiding failure. If you are reluctant to take the risk, you should reconsider whether the  life of a small business owner is really for you.

Family & Friends

Asking family and friends to invest in a business can be easy for some people, difficult for others. You can make your pitch more successful by being prepared.

Present a well-developed business plan and be clear about how much you need. Don’t take offense if someone pokes holes in your idea. And if someone says no, say thank you–and then ask what they might be willing to offer instead of money.

Be sure everyone is clear about the nature of their investment. Is this a gift, a loan, or partial ownership in the company? Will the investor have a say in how you run the company?

Finally, put everything in writing. If necessary, seek assistance from legal and/or accounting professionals.

Government Agencies & Nonprofits

Many government agencies and nonprofits offer financial programs to help businesses start and grow. Most of these programs involve loans that need to be repaid. Few, if any, involve grants.

In direct lending programs, the organization lends money directly to the entrepreneur/business owner. Typically, these programs involve microloans of between $500 and $50,000. There are usually restrictions as to how the loan can be used. Often, borrowers are required to participate in business workshops offered by the organization.

In loan guarantee programs, the agency/nonprofit acts as a third-party “co-signer” in a loan between an individual/business and a traditional financial institution, such as a bank or credit union. The organization promises to repay a certain percentage of the loan should the borrower default.  Loan guarantee programs can help businesses secure a loan they would otherwise not qualify for.

You may have heard about “SBA loans” offered by the federally-funded Small Business Administration (SBA), www.sba.gov. Note that the SBA program involves loan guarantees, not direct loans.

Banks & Credit Unions

Traditional financial institutions such as banks and credit unions offer a number of financial products for small businesses. These include loans (guaranteed SBA loans as well as non-guaranteed loans), lines of credit, and credit cards. Many banks and credit unions employ small business financing experts who can walk you through all the products they offer.

Crowdfunding

Crowdfunding refers to a particular type of investing facilitated by a technology platform and governed by the crowdfunding site’s requirements and/or federal laws.

Incentive-based crowdfunding (e.g., Kickstarter) allows people to raise money in exchange for an incentive, like a t-shirt or tour, rather than a share of the company or a monetary return.

Equity crowdfunding involves selling shares of a business venture in exchange for money from investors. This type of crowdfunding must adhere to certain rules and regulations.

Other Options

Angel investors are serial entrepreneurs looking for a financial return on investment and the experience of helping a company start and grow.

Online lending institutions (e.g., Kabbage and Lending Tree) connect people who need money with individuals and institutions looking for a place to invest their money. These sites offer application process and have a wider risk tolerance than traditional financial institutions but tend to charge higher interest rates.



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