Sources of Small Business Financing

Published Nov 20, 2020 

Small business financing refers to the means by which an aspiring or current business owner obtains money to start a new small business, purchase an existing small business or bring money into an existing small business to finance current or future business activity. Thousands of small businesses open their doors for the first time each year, but most of them will close doors again within five years. Those that do close usually do so because their owners failed to secure enough capital to finance the business. Sometimes this happens because they simply didn’t know where to go for funding. This doesn’t have to happen to your small business.

Small Business Financing through your own cash

The best way to finance your business is with your own money. Consider dipping into your savings account, taking out a home equity line of credit or cashing in against stocks, bonds or mutual funds. Exercise caution when using your own money. Never put yourself or your family into an unsafe financial situation for the purpose of opening a business. If the business goes under, so will your personal finances if you aren’t careful. This includes using credit cards to finance your business. If the spending gets out of control or the company doesn’t become profitable, you will end up with large credit card bills that you might not be able to pay, leading to poor personal credit.

Small Business Financing through Relatives and Friends

Few people like asking for loans from friends or family members, but if you know of someone who has the money to invest and would be interested in your idea, it is worth considering. They probably won’t charge you interest, which means you’ll save money when it comes time to pay back the loan. You might also consider bringing a family member or friend on as a partner so they know they will get a return on their investment if the business does become successful.

Traditional Business Loans

Banks are the most common places small business owners go for financing, but they can also be the hardest places to secure funding from. If you go this route, be sure you have a very clear and executable idea. Bring a solid business plan with you and be sure it includes a break-even analysis that estimates your company’s financial obligations and expected revenue to show its potential for profitability. Be able to prove that you’ve researched the costs. Even with a solid business plan, banks often hesitate to fund startups because they prefer to finance businesses that have already proven they make money. However, if you have the ability to put up personal assets as collateral or if you have someone who will co-sign with you, you are more likely to be approved. Alternatively, you could check out the Small Business Association or similar local organizations that offer lending options.

Private Investors

You may be able to find a private individual, company or organization that is interested in your idea and wants to invest in your business. While this works for some, it is important to know that many of these types of investors will expect to be part of the company’s daily operations and decisions, requiring you to compromise about how to run your business. Investors are usually interested in ideas that they expect will have a high return on investment (ROI). This is a good route if your company is tech-related.

Leasing Companies

One way to save money and secure what you need for your business is by leasing your equipment. Leasing companies often provide electronic equipment, such as computers, phones and other office equipment. You can even lease cars if you need to. While this means you pay a monthly bill and purchase your equipment over time, it saves you from spending thousands of dollars to buy outright without knowing if your company will succeed.

There are many ways to secure financing for your small business, especially if you are willing to think outside the box. A solid business plan, knowledge of your industry and an enthusiastic attitude is likely to help no matter where you choose to secure your capital.

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