Plenty of people come up with good ideas for businesses, but few actually act upon those ideas. There are plenty of reasons for this: some people suffer from self-doubt and fear failure, leaving them unable to picture themselves as successful business owners in the real world. Others just don’t have the drive to succeed, lacking the ambition necessary to take on the role of entrepreneur. However, one of the most common reasons people hold off on starting a business is simple economics: they don’t have the money.
As the old saying goes, “You have to spend money to make money.” That’s certainly the case with getting started as an entrepreneur: financing a business isn’t easy, and unless you have rich friends or family members to fall back on, chances are you won’t have all the money necessary to get a business off the ground. This means that if you want to pursue your entrepreneurship dreams, you will need to find outside funding. But what are the best options for small business owners?
Before You Go Looking
Before you start seriously looking into funding options, you should do a thorough evaluation of your current financial situation and how much funding you think you’ll need. No matter what size your business is, you need to have a clear sense of what your expenses are going to look like, not just on the first day of launch, but for the long run. You’ll need to consider the costs of things like office space, legal fees, payroll, business cards, and any other organizational expenses. There are also more specialized expenses for things that are specific to your industry, including unique equipment, permits, business licenses, etc.
Common Funding Strategies
Once you have a detailed breakdown of how much money you need for your business, you can start looking at different funding options. Here are eight of the most common funding strategies available to aspiring entrepreneurs.
The first source you should look towards when it comes to funding is yourself. Do you have any savings stowed away that you can use? Additionally, Bootstrapping can also include turning to family and friends for capital or even tapping into your 401(k). There are benefits to this option: you (for the most part) retain complete control of your business, but you must also shoulder all of the risks. If you end up spending more than you can afford it can come back to bite you.
- Credit Cards:
Credit cards are obviously one of the easiest ways to get extra money, and unlike most business-related loans, you won’t have to justify your purchases to anyone. However, it is almost always a bad idea for credit cards to be the main way to fund a business venture. After all, credit card interest rates can be quite high, and can easily result in major debts if you run into further financial problems.
Traditional banks tend to be the starting point for many business owner’s searches for funding, especially if they are already established and have strong credit scores. Locally-owned banks can be an especially good resource for small business financing, as they tend to have a strong interest in the local economic development of their community. Even a bank doesn’t end up providing funding, it can still be a valuable source of information, including what documents you need and what your best options might be.
- Credit Unions:
Similar to banks, credit unions offer favorable rates and loans, typically backed by the SBA. Unlike banks, credit unions have steadily increased their small business funding in recent years, making them a good option to look into. However, many credit unions will only offer funding to members, so be sure to check about any such requirements before trying to move forward in the process.
- SBA & Other Small Business Grants
The U.S. Small Business Administration offers lenders, mostly traditional banks, a federal guarantee on your loan. However, many banks are less willing to offer loans, so you might be better off going directly to the SBA for a loan. This can be a great option if you don’t meet a bank’s lending criteria, but be aware that the application process can be long and arduous.
There are also plenty of other small business loans and grants out there, look out for the many nonprofits, government agencies, and organizations that offer them. Some grants even focus on specific types of business owners, such as women, minorities, and veterans, so if you fall into certain groups, you might be able to find a loan specifically for you. Be aware though, these loans often have tough competition, so they aren’t a sure thing.
Crowdfunding has taken off big time in the last several years, with Kickstarter and other websites allowing people to pitch their idea directly to potential investors, often rewarding those who sign on with perks or equity in exchange for cash. The process isn’t for everyone, and there are major legal considerations to worry about, especially with equity crowdfunding. But crowdfunding is a viable alternative for the more internet-savvy business owner with a truly unique idea.
- Venture Capitalists & Angel Investors
Venture capitalists take equity in a company in exchange for financing, giving themselves an ownership share and an active role in the company. Similarly, there are angel investors: high-net-worth individuals who get an equity stake in return for their financing. While angel investors draw from their own money, venture capitalists are employees at risk capital companies who invest other people’s money into businesses.
Both options are commonly associated with larger businesses, but in some cases, it can be a worthwhile investment strategy for a medium- or small-sized company. This option can lead to heavy financial backing, but it also means you will have far less direct control over your business, as angel investors will likely heavily scrutinize your plan, while venture capitalists will want positions of authority.
Adding It All Up
When it comes to funding, there isn’t a one-size-fits-all approach. Every business has unique funding needs, and each funding option differs greatly in terms of availability, eligibility, and funding amounts. So be sure to do your research, investigate all viable options, and consider what best suits you and your current needs.