Many Americans are starting new businesses every year. In fact, ain 2010 found that there were at least 27.9 million businesses in America. About 75% of them had only the owner working in the business.
However, only half of these businesses get past five years. Another 30% made it to 10 years, but only a fraction was able to scale up to medium-sized enterprises.
The main hurdle is financing. Many businesses don’t have enough money to finance operations or even lift a startup off the ground. If you’re caught up in this dilemma and you don’t know where to start looking, this article is for you.
In here, you’ll learn about the various ways you can get funding for your business.
This mode of financing is recommended for small business. You can fund your small business and scale it up as time goes by. Keep in mind, however, if the business doesn’t go as planned, you’ll lose your investments. If you go for this route, you might want to consider a number of ways to fund the business.
✓ Consider Your Personal Savings
This is the easiest way to fund your small startup. The money could come from family inheritance or your checking account. By using your own money to fund a startup, you show you possess the determination and zeal to see the business through.
In addition, it’ll be easier to convince investors to pump money into a project when they can see what you’ve already done by yourself.
✓ Sale of Some Assets
These assets can be in the form of property, bonds or stocks—anything you can sell to raise money to fund your business. This is also an old-school method of raising money, but prepare to meet tax hurdles associated with selling specific assets like stocks and real estate.
If you wish to follow this route, you need to proceed with caution, otherwise, you might have to deal with the IRS.
✓ Use Your Credit Card
You can also use a credit card to buy items needed for your business. However, you need to keep in mind the high-interest rates attached, should you fail to pay off any balances monthly. If you have a good credit score, interest rates can range from 13-22%.
Since the main hurdle in using credit cards is the monthly payments, it can be difficult to make payments when your business is still young in terms of revenue. Therefore, the best move is to go for credit cards offering cashback programs or rewards when you make business purchases.
Furthermore, try and look for credit cards offering low APR rates for short duration loans of about 18 months and below.
✓ Borrow a Bank Loan
If you’ve tried out multiple options with no success, you can always walk into your bank and try to convince them into issuing a personal loan. These loans come with far more favorable interest rates, often ranging from 6-13%, although what you’ll pay will depend on your credit history.
However, banks have strict terms including securing your loan with collateral. Don’t worry though, if there isn’t any collateral and your credit history isn’t good, then a co-signer can act as your security. The co-signerthe bad credit loan if you fall behind on payments or default entirely.
2. Family and Friends
Sometimes a personal saving isn’t enough to kick start your business, or you don’t have a stellar credit score to help convince the bank to lend you some money. This is when you turn to your friends and family for help.
The best part about this option is that they might decide to overlook your financial past and still extend you the loan. In addition, they’ll be far more lenient when it comes to loan terms and the interest rates. Sometimes you can even get the loan interest-free.
In 2016, a survey conducted bythat about 68% of small businesses seeking funding from family and friends.
Since you’ll be banking on a close relationship to get the loan amount, it can suffer if you fail to pay up. Money issues can be quite sensitive, especially when there’s no contract involved.
For this reason, it’s advisable to have all the terms of the loan written on paper. This includes the amount borrowed, interest rates, repayment schedule, and duration.
3. Small Business Administration Loans
The SBA came to life courtesy of the American Congress in 1953. They don’t offer loans to businesses, but they offer some form of security for loans offered by financial institutions such as credit unions and banks.
✓ The 7a Loans
This is a common method used by small business owners to launch their businesses or scale them up. According to the SBA, there’s no minimum amount you can take out, but this program won’t fund anything higher than $5 million.
According to the SBA, $337,730 was the average loan amount taken out in 2012. If you need a loan of $150,000, SBA can guarantee up to 85% of the entire amount.
You can get these loans from non-profit lending institutions such as community-based lenders. This program from the SBA provides loans of a maximum of $50,000 for expansions and startups as well. You can use this money to buy office equipment, inventory and other supplies.
However, the SBA restricts the use of this loan to pay off an existing debt. You’ll also have to repay the loan within a period of six years with interest rates ranging from 8-13% although you can negotiate with the lender.
Some lenders will also have their own requirements which borrowers need to meet such as personal guarantees and security. In addition, lenders might require you to take a business course in order to get a microloan.
This type of loans target entrepreneurs with a poor credit score or those who don’t have assets to put up as collateral.
4. Venture Capital
for startup businesses and in exchange, you’ll have to offer them an agreed equity stake in the venture. A number of VC’s tend to be quite selective when it comes to the type of business, they want to invest in. Most of the time, they’ll go for a business that has a proven track record.
After investing, the venture capitalist will be hoping the business will scale up and eventually hold an initial public offering or be sold to another firm. At this point, the VC will cash out their equity stake in the business.
The internet has been used as a marketing tool for many years. However, the recent past has seen the internet emerge as a new source for funding.
Crowdfunding is the term used for sourcing funds from various people on a selective digital platform. An example of this is Kickstarter, a platform where individuals, artists, charities and entrepreneurs can seek funding for business ventures and ideas. Before starting a funding campaign, it’s crucial for you to understand how your preferred platform works.
Some platforms may hold the amount collected until you hit the ultimate target. If you don’t hit the target, the money collected might be returned to contributors. The platform will also take some percentage of the funds raised.
Final Words-Proper Planning and Business Understanding is Required
Sourcing for funds to kick-start your business is a difficult task that requires a lot of effort and planning. However, there are numerous funding options available at your disposal and while these sources exist, it’s important for you to weigh them against one another.
You need to understand your business in order to select the best financing option. Therefore, think through every available option before making the next move.
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