Financing your small business venture
Owning a small business is the second biggest financial dream in America, after owning a home. It is a worthy goal and is no doubt very rewarding for the many entrepreneurs that set out on their own.
One of the more difficult parts to starting your own business is having adequate financing. All businesses need some level of capital to get through the early days until the customer base is sufficient to generate positive cash flows. Many a business venture fails due to inadequate capital. To prevent this from happening to you, create a realistic budget and determine the amount of capital you will need to get your venture up and running. Do not set out until you are comfortable that you have enough funds.
Some start-up businesses will require significant amounts of capital (i.e. think drug development and obtaining regulatory approval) and some can be started on shoe string budgets (many service businesses). Here are some ways for budding entrepreneurs to finance a start-up:
Finance it yourself – Most people do not have sufficient capital to finance their own business. However, many service related businesses are not capital intensive. For example, a business painting houses would not require a huge amount of capital to get started. These types of businesses may be accessible to individuals that are prolific savers and are shrewd with a dollar. It is worth noting that the early days of a self-financed business can be rather stressful. Your paycheck stops arriving and you spend much of your savings.
Family and friends – The next source of business financing will come from family and friends. Depending on the amount of capital necessary, you may consider asking this group of people. Unfortunately, should the business fail, you may place considerable stress on the relationships involved. In many cases the stress on the relationship can be irreparable. So act with caution when asking this group.
Angel investors – Angel investors are individuals, or groups of individuals that invest in small or budding business ventures. Usually, they will invest anywhere from a few thousand dollars up to a million dollars. In many cases the investors are retired business persons and will provide management assistance to your burgeoning new business. This serves to help the business and for the investor to keep an eye on his / her investment.
Venture capital – Venture capital is for high potential growth companies, usually in the technology industry. Venture capital firms typically pool the funds of wealthy investors and institutional investors. While there is no set limits on the amount that a venture firm will invest, it is usually between one and two million dollars. This type of funding usually goes to a business that is already operating and showing some early promise. As venture capital firms become involved in your business, they will certainly take an active role in management and be looking to maintain seats on the Board of Directors.
Small Business Administration – The SBA is a branch of the federal government. They primarily act as a guarantor on bank loans. Only in very limited circumstances do they make direct loans. There are several different types of loan programs that may be used by entrepreneurs, including the 7(a) Loan Guarantee program to help small entrepreneurs start or expand their business and a micro loan program which funds loans up to $35,000. If you are considering an SBA loan, go to an approved bank to get more information.
