One of the first problems business owners’ encounters is finding money to start their small business. This process can be difficult and very frustrating for most people. What makes this process frustrating is a combination of wrong expectations and looking for money in all the wrong places.
Finding the money, you need to start your small business requires a lot of endurance. You need to work hard to overcome potential rejection if you want to be successful.
Funding sources for small business
Many small business owners start their companies by investing their own savings. This source of financing can be ideal if you can afford it. It puts you in full control of how much you are going to get. You never have to justify yourself to investors.
Using your savings takes some sacrifice and determination. You can save a percentage of your income each month and save as much as you can for as long as you can. You will need every dollar you can get your hands on. You might have to give up some things like vacations for a while. The reward is the ability to launch your startup.
Many entrepreneurs also use their credit such as credit cards or a home equity loan to start their small businesses. It is important to be very careful about using these sources because you can ruin your personal credit, risk your home, or both. If possible, avoid using a home equity line of credit as the risk is too high.
Credit cards are best used to pay expenses that are directly related to a project. Once the project is completed and the client pays, pay the credit card back. It is best not to use credit cards to pay for startup company expenses that are not related to a specific revenue-generating project. This strategy limits the chances of something going wrong that could damage your credit.
Family and friends
You can finance your business through the help of family and friends. This is one the riskiest ways to finance a business because if things go wrong, your relationship with the family member or friend will be affected. In any startup business, you are guaranteed that things will go wrong at one point or another.
Customers and suppliers
Your customers and suppliers are two great funding sources for small businesses. Customers can finance your business by prepaying or giving you an advance for orders. You use these funds to handle their transaction. This funding is not easy to get but customers may be willing to prepay if your service is unique enough or if they really need your products.
Suppliers give your company 30 to 60 days to pay an invoice. Getting supplier credit is similar to getting interest-free financing for 30 to 60 days.
Small Business Administration
The SBA is another great source of funding for a small business. They have a microloan program which is easier to get than traditional financing. The SBA works with banks to provide 7(a) loans too. These loans are larger than microloans and have stricter underwriting criteria.
Peer-to-peer (P2P) lenders offer a platform that allows people to seek financing from other individuals. It acts as a matching service and provides due diligence. P2P loans are small like microloans, they cap at $25,000 to $35,000.
Small businesses in certain industries need equipment to get started. One way to finance the equipment is leasing it through a finance company. Most equipment leases are structured so that the finance company buys the equipment and rents it to you for a monthly payment.
Think of crowdfunding as a platform on which you can pre-sell your products to consumers. If enough customers pre-purchase your product, the transaction clears and you can move forward. Crowdfunding is a great platform if you are selling an innovative product that could have mass appeal. Two crowdfunding platforms that are well known and often used by entrepreneurs are Kickstarter and Indiegogo.
The Bottom Line
A small business owner needs to find the money they need to start their small business and there are many options available. It does not have to be hard at all, by knowing the options you have available can be very helpful.