For many entrepreneurial business startups initial funding for its business stands out as one of the key obstacles to getting its company off the ground and moving forward.
According to the Small Business Administration's Office of Advocacy, small businesses seek financing for four primary reasons:
1) Starting a business
2) Purchasing inventory
3) Expanding the business
4) Strengthening the business
What approach should you take to seeking and securing your funding that will best suit the intent and needs of your small business? Understanding what types of financing is available is a good first step in determining that.
While there are two primary categories of financing -- debt and equity, other options exist as well.
This involves borrowing money from a business lender such as a bank that you must repay (usually with interest) over a period of time. Generally, some or all the assets of your business will be used to secure the loans. To provide protection from loan default the lender commonly requires the borrower to personally guarantee repayment which places your personal interest at stake. Most likely a bank will require a business plan which is a narrative that includes: nature of your business including legal business entity; product or service, market area you will serve, how you will attract & retain customers, sales & marketing strategies, operational processes, and full financial projections.
Banks have historically been a major source of small business debt financing, but some have become more reluctant to offer long-term loans to smaller companies because of the risk involved. Fortunately, the Small Business Administration's SBA 7(a) program has helped fill the void by encouraging banks to issue long-term loans to small businesses unable to obtain financing on reasonable terms through conventional lending sources.
Br securing equity financing (or equity capital), a small business raises money by offering shares of ownership in its business. Investors' equity investment's provides them an ownership stake in the business, and allows them to share in the company's profits.
Equity capital financing may come from a variety of sources. It can include your own personal savings, your life insurance policy, family, friends, employees, customers, government grants, venture capitalists, or angel investors.
Equity investors will naturally expect to get a sufficient return on their investments. Some might also require that they have a hand in your company's decision-making and future direction.
Other funding options
These other financing and cost-sharing options also exist.
• Joint ventures
You might also consider researching business incubators. While they typically don't offer cash, they do provide some combination of valuable support in the way of free or discounted administrative services, an affordable workspace, shared office equipment, and even management guidance. Fox Valley SCORE provides free confidential mentoring to clients in 17 locations throughout DeKalb, DuPage, Kane, Kendall, McHenry and Will counties. If you need help with existing business challenges, or are thinking about starting a new business, visit our website and click on the blue bar "Book a Mentoring Session." Click on "Take a Workshop" gray bar to register for one of the many free workshops during the year. The website is foxxvalley.score.org/