In this lesson we’ll go over the different options available for financing your small business.
There are numerous challenges when establishing your own small business. Financing is a major aspect to consider when embarking on this journey.
Determining where the funds are going to come from can sometimes turn out to be a very nerve- racking endeavor.
This really is an obvious obstacle, that you must overcome, and one, which often prevents many people from starting their own small business.
Bank loans are usually the first step that most people take when attempting to start their own small business. Banking institutions can become demanding for things like collateral and business plans. Banks do tend to make it hard for the people attempting to start their own business. The demand for personal assets and the thought of putting your home up for collateral can be stressful and scary at the same time.
Banks can also demand that the business owner actually rent their business space as compared to purchasing the space. They make these demands occasionally because they do not want you to tie up their money in assets that in the bank’s eyes will offer no short-term rewards. Banks may even demand that you use their money for inventory, which will offer them some immediate returns in case of closure. You must also keep in mind that these loans come with interest charges that will increase the amount that you must repay.
Applying for government grants is something I recommend to every person interested in starting their own small business. The US as well as other countries has numerous programs that cater to the needs of potential small business owners. Make sure you check not only the federal government but also your local state and state government as well for possible grants, which could aid you in your venture. Applying for a grant is not an easy task, but it’s well worth the effort because the money does not have to be repaid.
When it comes to relatives or friends you may be reluctant to ask to borrow money to start your small business, but this is sometimes a good option because they are obviously people who know and trust you. The only downside to this suggestion of relatives or friends is that they may feel that they own a stake in your business, so it’s important that you keep the terms clear from the beginning.
This type of loan often has no legal binding however; it can create serious rifts between you and your loved ones. Be sure you point out that the money is only a loan and will by no means give them any share or say in your new small business. Dipping into your own personal funds is another way to fund your small business. This is typically used with a combination of other methods. The great thing about this approach is that you’ll not be confronted with interest charges and personal conflicts that other loans may demand.
One more option to consider is accepting private donations or seeking out investors. If you feel you have a great new idea for a new small business, it’s possible to sell your great idea to potential investors; these are commonly called venture capitalists.
Unlike receiving loans from your family members, this method will without a doubt involve the investor having some type of stake in your business. The disadvantage of this method is that the idea has to be creative as well as potentially profitable because you literally have to convince the investors that you are going to make money.
Often a controlling interest in the company will be given if an investor spends their money for you to start your own small business, so you must be prepared to share control of your business to some extent.
Whichever way you decide to fund your small business it’s important that you do your research and be ready to face any obstacles that may get in your way.
Look for Part 3 next week!
We’ll be talking about creating a professional business plan for your small business.[/hidepost]