Financing your small business can be one of the biggest hurdles for a small business owner. Whether you desire to open a chain of restaurants or an Internet-only business, capital funding is required to fund your dreams. Here we will explore the different types of funding available to you:
Debt financing includes any money you will pay back. It does not require you to give up equity in your company and can be a good choice for entrepreneurs who have not been able to attract the attention of investors. This type of financing usually requires personal collateral and will require you to pay interest.
- Loans – Loans are available from a variety of sources, including local banks, the Small Business Administration and non-profits. Requirements vary, but they are usually credit-based and will require you to pay interest. Some economic development organization microloans may take into account character as well.
Equity financing requires you to give up a portion of your ownership to investors in exchange for their money.
- Friends and Family – For most business owners, this is the first stop when looking for funding. Your friends and family members know your character, and the process to get money is usually much shorter than other methods. Even better, most will not request a stake in your business in exchange for funding. Even though you know these lenders personally, make sure you get all agreements in writing.
- Angel Investors – These are high-worth individuals or groups of people who exchange their industry expertise for a portion of your company’s equity. These investors can be hard to find, and some only focus on certain sectors. An Internet search may uncover the angel investors in your industry.
- Venture Capitalists – These companies are usually interested in established companies or start-ups that will quickly be poised for sale or public offering. There are usually high standards for receiving this type of funding, and you must be willing to give up a portion of your control.
Other types of funding:
- Business Plan Competitions – Many are run by local business schools and require you to partner with at least one student to enter the competition. Winning could mean networking opportunities, funding and ongoing support.
- Government Grants – Though it is a popular belief that the federal government provides small business grants, money that you do not have to pay back, it is not entirely true. Most grants go to local non-profits that help start-ups rather than the businesses themselves. Some states do, however, provide grants for special industries, such as technology and “green” sectors. Check your state’s requirements for more information.
As you can see, there are a variety of ways to get financing for your start-up. An accountant or financial manager can help you decide which type of funding would be best for you. For more information on business financing, including sample promissory notes that can be used for family and friend loans, download the SCORE Financing Guide: http://www.score.org/pdf/FinancingGuide.pdf.
This article, by Dequiana Jackson, was originally published in Gemini Magazine.