For aspiring entrepreneurs, the most intimidating aspect of starting a business is finance. This becomes even more challenging when you want to envision an innovative idea into a small business. As it is, an entrepreneur may not have sufficient funds in hand to launch a startup. On top of that, banks are not as eager to provide loans to brand new SMEs. Despite all that, thousands of small businesses continue to emerge every year, because opportunities to raise finance are still available at large.
If you can’t finance your business with your personal funds, there are a wide number of traditional and new funding sources that can help you raise the capital to kick start your business. Let’s discover some ways through which your small business can raise capital investment.
Small Business Loans
Small business loans like the Small Business Administration (SBA) offer entrepreneurs the choice to raise capital via two loan options:
- The 7(a) Guaranteed Small Business Loan – Potential borrowers may apply for this loan at banks that partake in SBA loan process. However, you need a proven track record of at least two years in the business cycle. The loan may take from 60 to 90 days before it is approved.
- SmartBiz – A new loan program by Better Finance Inc. and Golden Pacific Fan that offers loans of $5,000 to $150,000 in only one week. It’s an easy way to raise capital with low interest rate SBA loan.
- The 504 Fixed-Asset Small Business Finance Program
Provided that you have an innovative product, service, or business model, with an effective business plan, you can take your efforts to the crowdfunding platforms. Kickstarter and Indiegogo are just two examples of the many crowdfunding platforms that you can use to raise capital. All you need to do is create a pitch, post it on a crowdfunding site and people will contribute to your project if they like it.
The only disadvantage with crowdfunding platforms is that they charge a high transaction cost, which could be anywhere between 5% and 10% of the total amount raised. To counter that, you need to get more investment from the crowd. This is why crowdfunding sites push you to come with a business model that is compelling, engaging, has a story to it, and is easily understood by the crowd.
Online lending is not to be confused with crowdfunding as it is a fairly new service. Business like Kabbage and OnDeck now offer you the opportunity to get loans in one of the fastest ways possible. All you need to do is prepare an application, which typically takes up to 2 hours, and wait for the decision and (if positive) funds to be issued in a matter of days. On the other hand, traditional loans may take from weeks to months to complete, let alone process. Hence, there is little questioning the fact that Larry Summers, US Treasury Secretary, expects online lending to reach over 70% of small businesses!
Otherwise known as invoice advancing, factoring allows you to ease the financial burdens a small business is bound to face in its baby years. Factoring involves getting an upfront payment for the invoices that are billed out. Hence, once your consumers start to settle their bells, you can pay back the amount paid front. Factoring allows your small business to get advance allowance that close the gap between the billed invoice and payments to contractors and suppliers. FundBox is a prime example of an advance allowance company that helps you accept new projects quickly while maintaining a steady cash flow.
Selling your innovative products before the launch data is possibly the most overlooked factor in raise capital investment. Once a small batch your products have been tested and developed, you may sell it to targeted consumers and retailers. This allows your business to raise additional funds that can be used in paying inventory, closing deals with retailers, ordering from suppliers and so on. Bittylab, a startup by Priska Diaz, managed to raise $50,000 from presales. This helped Diaz to pay for the inventor and learn more about website traffic. While there are challenges with this method, when applied successfully, it is one of the most effective ways to raise funds.
Friends & Family
If your friends and families have some spare finances, then you have another source for raising capital. Borrowing from friends and family has its advantages as you can work out a convenient payment method without the hassle of contracts. You may return the funds borrowed for low interest or no interest at all, or may issue shares or a percentage of the revenues to your friends and family. With this option, you have many possibilities.
However, it is worth noting that often business deals with friends and family may damage relationships. The best way to counter this is to ensure there is frequent communication between your friends and family who are lending. Business success is never a guarantee, so make sure you have a contingency plan for your friends and family in case your startup fails to achieve its potential.
If your small business has started raking in revenues, then a venture capital investment may offer you a great source for additional finance. Venture capitalist firms will find your business attractive if it has a fast growth potential, business plan for the next five years, and room for growth through investment.
One major drawback with venture capital investment is that since venture capitalists are always on a short leash in terms of business loyalty, they will look to recover the investment they made within a 3 to 5 year window. Hence, if you have products or services that fail to provide the ROI that your venture capital firm anticipates, then there is no reason as to why a venture capitalist will invest.
Raising finances can be challenging, but the learning curve is something that will help you in making better financial decisions in the future.