Without growth, small businesses are often destined to fail. Expansion requires more labour and increases overhead costs, both requiring increased capital at a time when a new business often does not have the funds needed. Coming up with plans to fund a small business can be trivial but a crucial aspect of any new company. There are two key ways to achieve the capital needed to facilitate the required growth – equity and debt. In this article, we will look at these two approaches.
Small business lenders – With a simple Google search, many possible solutions will come up, all of them wanting to get behind new companies. However, the majority of lenders will only offer high rates taken on assets. Due to the short-term basis of the loans, a person may end up paying as much as 36 percent interest over a year period.
Traditional bank loans – This is another option but it can be difficult to secure if there is no proven track record from the business owner, and they require assets to secure loans. Loans from a bank are paid back with interest in the set time period. Ensuring that the repayment time is adequate is important.
The Small Business Administrations – Another viable option for securing capital to grow your company is through The Small Business Administration. The programs that they offer will often require surety that the loan will be repaid. The administration’s goal is to help small businesses flourish.
Bootstrapping – This is the process of the business funding itself – as more money comes in, the funds are put directly into further growth. Once a business thoroughly looks at their books, they may find that their revenue from sales is enough to grow their company over time without the need to lend money.
Family and Friends – Securing a loan from family and friends can be a solution to some businesses. They can provide both equity and debt funding. There are advantages to getting money this way as they will not likely impose on your business. Caution should be taken when selling a part of the business in order to get the capital as new companies can fail leading to possible loss of close relationships. Possible investors should be fully aware of the risks involved.
Self-funding – The owner of the business may be in a position to fund the company’s growth themselves. Offloading assets such as boats or a second home can be a good way to generate the capital needed. The owner can also choose to take out a personal loan through their credit card or by taking out a second mortgage.
Angel investors – Increasingly, there are more angel investors that are looking to buy into new businesses. These are people that make their living investing on sites such as CMC Markets. Investors such as these often form investment groups in order to spread the risk as well as gather their research better. A local chamber of commerce can be an excellent way to find these groups or individuals that would be interested in making an investment.
Partnerships – Taking on partners is another alternative. They would not necessarily become a working member of the company if they are just bringing the additional capital needed. The company can greatly benefit from aligning resources with a strategic partner. Partners can also be established with other businesses that could benefit from your company over the long term, such as a property management group with a property maintenance business.
Crowdfunding – Crowdfunding uses a website where a person is able to pitch their idea and have thousands of people invest with usually small amounts of money. With the many different websites that offer this service, proper research should be done before venturing forward with this plan.
Venture capital – The final option that owners of new businesses have is venture capital. Firms would invest into a company at the early stages of its growth. However, you can expect the firms to require a large stake as they normally invest large sums of money. This usually puts the owner in a position of not owning the majority share in their company.
Finding the funds needed to grow your small business is often easier than initially thought, especially if your business is sitting on a good idea.