When starting your small business, your sources of business finance may be more limited than for one that’s been around a while, however that doesn’t mean there aren’t any.
Let’s have a look at some common sources:
- Personal Capital
- Banks or other lending institutions
- Friends or Relatives
- Private Loan Lenders
- Government Small Business Loans
- Small Business Venture Capital
- Credit Cards
Lets go through each in detail…
Sources of funding when starting your small business
Let’s discuss the following in more detail.
This is the most common of all sources of business finance for a new business. This is partly due to banks or other lenders being unwilling to lend more than a portion of the start up money required.
This money can come from savings you’ve made, a redundancy payment, the sale of an asset, etc. The main point here being that it is money you have complete control over.
If you are starting the business while keeping your job or working in an existing business it may be possible to fund the new one from your existing income and managing business cash flow carefully.
Something to keep in mind here is that investing your money in a business, like any form of investing, carries a certain amount of risk. While there are ways of controlling that risk, like having well researched and realistic business and financial plans, it’s wise to remember the old adage, “Never risk more than you’re willing to lose”.
Banks or other lending institutions
Banks or other lending institutions, such as Saving and Loan Associations and Building Societies, are the second most popular sources of business finance. They will always want some form of security and will expect you to provide them with a business plan along with cash projections for at least the first 12 months of operation. Other things they may want to know could include references, your personal credit history, your qualifications to run the business, past experience, etc.
While there may be a number of hurdles to get over to secure bank funding, providing you do your homework and are prepared to put up enough capital of your own, these are not insurmountable. And once you’ve got your loan the banks don’t tend to exert any influence on how you run your business. Providing you service the loan as required they’ll be happy.
Friends or Relatives
Friends or relatives can be sources of business finance however it can be a double edged sword. While they may be less stringent regarding your credit and the expected return on their investment, many a relationship has ended over the borrowing and lending of money when starting your small business.
Structure any deal with a friend or relative the same way as you would with a bank. Prepare a business plan and draw up a legal agreement outlining the terms of the deal. This keeps it on a professional footing that may head off potential problems down the track and it will make both of you feel better about it.
Private Loan Lenders
There are private individuals out there with money to invest when starting your small business and they will often lend where the banks won’t. They may take on more risk than the banks however they do tend to look for great business ideas, with a watertight, realistic businesses plan and sound management experience. They’ll also want a higher rate of return than a bank.
Lenders like this can be found through capital brokers, lawyers, accountants and business brokers. If a bank has turned you down they may also know of some private lenders who could help.
Government Small Business Loans
Countries like USA, Britain, Canada and Australia have government grants, loans or loan guarantees available which are possible sources of business finance when starting your small business. A lot of these programs are only available to established businesses however there are some available for start ups. While the New Zealand government offers a lot of advice it doesn’t provide any grants or loans.
Local government can also be a source of grants or loans and in some cases it may be easier to get funding there than from central government. In either case you’ll need to show them that your proposal will be successful.
Small Business Venture Capital
Venture capital is money that is available to invest in high-risk start up companies that the investors think have the potential for rapid growth and will be highly profitable. They will be looking for innovative ideas, technologies or business models, backed up by an outstanding business plan and management ability.
In return for their investment, a venture capitalist will want ownership of a proportion of the company with significant control over how the small business accounting will be run. The benefit you’ll get from this relationship, apart from the money, is the expertise they will bring to the table, which will be substantial, as well as any connections they have.
Venture capitalists are not interested in your typical small business and close on 100% of all venture capital requests are turned down however if you meet the above criteria have a go. You’ve got nothing to lose and you’ll learn a lot.
Be very careful starting your small business when using credit cards to fund your start up as they are one of the most expensive sources of business finance. If you don’t pay it off each month the interest can become crippling.
Where they can be useful is for purchasing from suppliers who won’t extend you credit. Getting that extra month of credit can improve cash flow significantly.