Funding Your Business
Establishing and building a new business can be challenging, and securing the necessary capital for such a venture is crucial. There are several options for obtaining business capital, and below we’ll discuss a few. Note, however, that this list of options barely scratches the surface, as the number of funding options for new businesses is nearly as vast as the imagination.
Traditional term loans from banks are typically a new business owner’s first consideration when seeking capital. Term loans are similar to a mortgage—a specific amount is borrowed and repaid according to a fixed schedule, with an interest rate that is either fixed or variable. A new business may not yet have sufficient credit history to qualify for a traditional term loan, in which case the bank will look to the business owner’s personal credit history when deciding whether to provide financing. As traditional lenders maintain less flexible credit criteria, a term loan from a traditional lender may not be an option for those with challenged credit histories or lower credit scores.
Small Business Administration (SBA) Loans
The SBA 7(a) loan program is a great resource for small businesses that want to expand or for entrepreneurs looking to start a new business, and the rates on SBA loans are typically more favorable than what you would get with a traditional business loan. Important to note is that the SBA does not actually fund loans, but instead guarantees, or backs, loans disbursed by approved lenders.
Another option for raising capital is individual investors such as family, friends, or even angel investors. The risks of borrowing from family and friends are obvious, but those risks can be mitigated by treating the loan in a formal and professional manner. For example, consider giving family and friends interest on loan payments, or equity in the business. Either way, formal contract paperwork should be drawn up outlining the terms. Angel investors are individuals who invest in early-stage or startup businesses in exchange for an equity stake in the venture. Some of the advantages associated with raising capital from angel investors include their willingness to accept more risk, and angel investors typically possess expert knowledgeable in the applicable field of business, knowledge that can leveraged.
Popular crowdfunding outlets, such as IndieGoGo and Kickstarter, allow a business to pool small investments from multiple investors versus seeking out a single investor. Crowdfunding may require you to pitch your business concept online in order to secure up-front pledges to fund the business, and you should know how to market yourself and be savvy with web content for these options to be effective. It is also important to know that some platforms have payment-processing fees or require businesses to meet their full financial goal in order to retain the capital raised.
Though financing a small business venture is no easy task, it can certainly be done by anyone willing to learn and put in the work. Consider carefully which funding approach best suits your business’s capital requirements, and then take action!