According to a recent report by the United States Small Business Association, ten percent of financing dollars for startups come from personal or business credit cards. But as businesses age, they become more likely to use credit cards.
It’s an accessible source of funding that doesn’t require any special applications after you open the card, and if you have a good credit score, then you may have a more extensive line of credit available to you.
But using credit cards comes with a downside as well, they have very high interest rates, and it’s easy to get in over your head. Fortunately, there are many other sources of business funding out there. They just require a bit more effort.
Read on to learn more about business funding and explore the avenues available to you as a growing business.
Set Your Objective First
Before you start pounding the pavement looking for investors for your startup, you need to have a clear idea of what you will need.
Start by making a business plan for yourself and outline the steps you need to take to discover a reasonable estimate for your enterprise. This may include contacting real estate agents to find out about available properties, researching government regulations for your project, as well as contacting others in your industry who have started their own business and asking them for advice.
While you may be their competition in the future, most small business owners are fairly open about their business practices and can offer you sound advice during your first few years as a fledgling.
Be Realistic About Business Funding Sources
The main funding sources for new businesses are taking on personal debt, using your own personal savings, taking out a line of commercial credit, asking friends and family for an investment, and outside investment.
That means that most likely, you will have to repay all of the money that you use to start your business. If you want to avoid having to pay everything back, then you can consider alternative funding sources for financing.
Using Your Savings and Personal Loan Debt Can Backfire
If you are planning on starting a business, then you are most likely going to put your own skin in the game by taking out at least a few thousand dollars for your cause. It’s the easiest way to get started quickly since you don’t have to wait for anyone else to believe in your vision.
But if your business fails, as many unfortunately do, then you will end up not only losing your business, but also potentially your life savings. Make sure you weight the pros and cons seriously before signing any contract for borrowing.
Alternative Sources of Finances for Small Businesses
There are other sources of financing available for small businesses such as angel investors and venture capitalists. But those kind of investments are rare.
To secure an angel investor, your business has to be able to show an opportunity for a reasonable return on an investment of a few hundred thousand dollars.
Then, to secure their investment, they will want to see that you are a high-growth business that plans to scale up to maturity within three to five years. They also will want to know that you are dedicated to your mission and experienced in your field.
Venture capitalism is very similar to angel investing, except venture capitalist firms pool a bunch of investor’s money and have a fund manager who holds the purse strings.
Very few people have the kind of track record required to secure financing from a venture capitalist firm. They only take businesses with track records of success, high growth potential, and who are ready to scale up.
You Can Have Your Loan Guaranteed by the Small Business Administration (SBA) for Savings
The SBA has a program where it will review your business plan against a set of criteria and guarantee your loan. There are various programs available for different kinds of businesses.
In general, the loans available through this kind of program involve you coming up with thirty percent of the overall investment and borrowing the remaining seventy percent.
If you want to take advantage of one of these programs, you will need to do a lot of research and spend a lot of time applying for the funding. But if you are looking for security in your decision to invest yourself into a business, then working with the Small Business Administration can offer that to both you and your bank.
Crowdsourcing Funding for Startups is Not Established Yet
Although websites like Kickstarter and GoFundMe have begun to open the door for collaborative funding sources, actual crowdfunding is not yet a legal form of investment.
The crowdfunding that takes place on websites like Kickstarter is actually donations and advanced sales purchases made through the platform. No one can genuinely invest their dollars directly into the company itself.
Over time, government regulations regarding this concept will develop, and true crowdfunding for small businesses can begin.
Borrowing from Friends and Family Requires a Delicate Balance
They say you should never loan money to a friend, but accepting funding help from friends and family may be a necessary evil to start your business. To ensure that everything with the borrowing process runs smoothly, you should consider having a lawyer draw up a contract that states if and when you are supposed to pay the money back.
If you don’t have an agreement in place and times get rough for your business, then it may become stressful for you to be around the friends and family members who lent you money. But those people are your biggest supporters and cheerleaders, and they are who you need to have in your corner as you fight for success.
By having your bases covered, you can rely on their support and know that there is a plan and a structure in place to pay them back when it makes sense.
Business Loans Signify Positive Growth
When you are looking for a business loan, you may feel a little bit stressed out. After all, it’s hard to know what tomorrow will bring. But taking on a loan doesn’t have to be a bad thing.
Instead, you should see it as a signifier that you are about to grow and succeed into the next phase of your development.
Even if you are taking out a loan to get your business through a slow period, you are investing in yourself and your vision. Try to see the loan process as just one step on your journey to success.
There are Online Lending Funding Sources Available
Online lending practices can often be predatory. So it’s essential that you take care to work with a reputable company if you choose this route.
Look for a physical address on the website of anyone you choose to borrow from. If they only have an online presence, that should be a red flag.
You should also look up the company to see what third-parties have to say about them. Verify that they are a quality company to work with before you take out a loan with them.
You can also look online for reviews of various companies. If there is a business that has been using shady practices, there is usually some sort of information available about it online.
But just because you have to be careful with online lending, doesn’t mean there aren’t any good opportunities out there for business funding.
Under the umbrella of online lending is:
- Peer-to-Peer lending programs
- Merchant cash advances
- Lines of credit
- Working capital loans
Legitament lending opportunities will be able to keep your information secure and can provide a simple and easy-to-access solution for funding for your business.
Consider the Terms of Your Loan Carefully
The term of your loan is the amount of time that it will take to pay off. Depending on when you plan to begin to make revenue with your business, you will have to come up with a plan for repayment.
Consider taking out a long-term loan so that your business has time to grow while you are paying back your loan. But make sure you pay more than just the principle. Otherwise, you’ll end up paying more interest in the long run.
More Resources for Small Business Owners
Now that you have a basic idea of where you can go to find business funding, you’re one step closer to opening the doors of your startup.
For more helpful advice on your journey, check out our resources section today.