Generally, there are four major ways for people to finance their small businesses. In this blog, we explore these common options.
Almost everyone, at one point or another, toys with the idea of how they could become their own boss. Many merely want to escape the grind of working for someone else, but just as many have a dream business that they would love to open and run. So how does one move from dreaming of it to actually making it happen? In almost every case, the biggest hurdle is securing capital to finance the business opening and starting up. Generally, there are four major ways for people to finance their small businesses. Still, every business is different, and each situation will have its own best financing method.
Crowdfunding
Still a relatively new option, crowdfunding allows you to seek capital from many individuals, often as a donation in exchange for something. This is less risky all around since you don’t take on the risk of a loan, and no one donor takes on more monetary risk than they are readily willing to. There are many crowdfunding platforms available online.
Personal Investment
The first place you should start is with yourself. It is important to decide how much of your own money you can devote to the business and how much you can fundraise from people you know. The more you can cover without needing to take a loan or line of credit, the better off your business will be. However, you should never invest all of your savings in case the business doesn’t turn out to be as successful as you hope.
Angel Investor
Angel investors are individuals who put up capital in exchange for being a partner and having partial ownership. While this is less financially risky than a business credit card, for instance, it carries other potential risks or drawbacks. Are you willing to share ownership, and therefore creative control with someone else? Additionally, if you ever want to sell the business, the decision will need to involve that person, and part of the profits will go to them as well. This person will be with you for the life of your business, more than likely, so make sure it is someone you’re comfortable with.
Small Business Loan
Small business loans are among the most common ways businesses secure capital to finance opening or expanding. Lenders are a reliable source for loans, but often they require high interest rates. This is because these lenders are usually banks, venture capitalists, or private equity firms whose sole purpose is to make money, so they need to see a return on their investment. Make sure that you shop around for good interest rates and go through the Small Business Administration for better terms and flexibility.
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