Raising capital is the most basic of all business activities, but it’s not always easy. In fact, it is often a complex and frustrating process. Taking time to research and prepare for fundraising will make the process go more smoothly. The following advice from the Small Business Administration can help.
FINDING THE MONEY YOU NEED
There are several sources to consider when looking for financing. Explore all of your options before making a decision.
- Personal savings: The primary source of capital for most new businesses comes from savings and other personal resources. While credit cards are often used to finance business needs, better options exist, even for very small loans.
- Friends and relatives: Many entrepreneurs look to private sources such as friends and family when starting a business venture. Often money is loaned interest-free or at a low interest rate, which can be beneficial when getting started.
- Banks and credit unions: The most common sources of funding, banks and credit unions may provide a loan if you can show that your business proposal is sound.
- Angel investors and venture capital firms: These individuals and firms help expanding companies grow in exchange for equity or partial ownership. A source of venture capital is the SBA’s Small Business Investment Company program. SBICs, licensed and regulated by the SBA, are privately owned and managed investment firms that use their own capital, plus funds borrowed at favorable rates with an SBA guarantee, to make venture capital investments in small businesses.
- Crowdfunding: Propelled by social media, crowdfunding finances businesses by bringing together individual investors and startups in an online forum. Peer-to-peer lending is a similar concept that falls under this umbrella.
There are also additional sources of capital, though not all are well suited to startups:
- Credit cards
- Customer financing
- Employee stock ownership
- Factoring accounts receivables
- Home equity loans
- Mergers and acquisitions
- Purchase order financing
- State-specific economic development programs
- Strategic partnering
BORROWING MONEY
Small businesses can face difficulty borrowing money, particularly in a slow economy. Entrepreneurs who have little financial experience may be discouraged by repeated denials to their loan requests. Requesting a loan when you are not properly prepared suggests to your lender that you are a high risk.
To successfully obtain a loan, you must be prepared and organized. You must know exactly how much money you need, why you need it, and how you will pay it back. And you have to be able to convince your lender that you are a good credit risk.
TYPES OF BUSINESS LOANS
Loan terms vary from lender to lender, but there are two basic types: short-term and long-term. Generally short-term loans have a maturity of up to one year. These include working capital loans, accounts receivable loans, and lines of credit. Long-term loans have maturities greater than one year but usually less than seven years. Real estate and equipment loans may have maturities of up to 25 years. Long-term loans are used for major business expenses such as purchasing real estate and facilities, construction, durable equipment, furniture and fixtures, vehicles, and the like.
SBA loan programs are intended to encourage long-term small business financing, but actual loan maturities are based on the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. Short-term loans are also available through the SBA to help small businesses meet their short-term and cyclical working capital needs.
Business Takeaways:
- The vast majority of startup financing comes from the business owner’s personal resources and friends and family.
- To use venture capital and angel funding, you must be willing to give up equity in your company in exchange for capital.
- To get any of the various types of bank loans, you must be able to explain how much money you need, why you need it, and how you will pay it back.
Source: http://www.allbusiness.com
