A common question among those who want to start a new small business is “How do I find the money to start?” Unfortunately, the answer is that there’s no one magical depository of funds. Contrary to what you may see on TV, no self-made billionaire is standing around waiting to throw money at your new and exciting business idea.
Here in the real world, there are many creative options available for funding a new company. It’s important to analyze all aspects of your business plan and future goals, as well as each funding option to start your business off on a solid foundation.
Top 6 Small Business Funding Sources
SBA Loan
For small businesses, the SBA can help locate loan opportunities in your area. There are several specialized options available, including microloans and loans that assist with disaster recovery. This avenue may be more feasible than trying to secure a traditional bank loan since restrictions have tightened.
Pros:Risk-averse banks may prefer making SBA-backed loans since the government guarantees up to 85% of the loan against default
Cons:The application process is lengthy and requires a ton of paperwork.
Community Banks/Credit Union
While large banks have cut funding to small businesses many community banks and local credit unions, have increased the number of loans given. Between 2007 and 2011 small business loan volume at small banks has increased from $17 billion to $302 billion.
Pros: Small banks are used to dealing with the nuances of small business loans as opposed to large banks who often have a more rigorous process and deal mainly with low-risk applicants.
Cons: Small banks may not have the variety and depth of services offerings and loans rates may not be as competitive.
Angel Investor
The real-world equivalent to Shark Tank, angel investors, are on a regular mission to find the next great idea, but they’re not simply investing their money in startups out of the kindness of their hearts. In return for funding, you’ll be asked to for a sizable percentage of your company.
Pros: Since angel investors are usually working alone and with their own personal money it can be an excellent way to raise smaller amounts of funding.
Cons: These investors rarely make follow-up investments due to the risk of losing more money.
Crowdfunding
Crowdfunding is a more recent form of startup funding and has gotten quite popular over the last few years. Platforms like Kickstarter and Indiegogo are great examples of websites that you can use to create a crowdfunding campaign. In general, those who give money make online pledges in return for the initial product at launch, in the form of a donation, or in exchange for some type of small reward.
Pros:The power of the crowd can help you get funding even when traditional methods turn you away.
Cons: It’s easy to forget but you are actually collecting money and asking for investments here making security law violations common.
Credit
If you have an excellent credit score, you may be able open a line of credit to fund your startup. There is a variety of specific credit cards created just to help entrepreneurs. Talk with your current bank about some of their options.
Pros: If you can make this option work you will be secure in knowing you are fully in control of your business and do not have to answer to investors.
Cons: This is definitely the riskiest option here since all the risk is being placed on your personal finances.
Venture Capital
Similar to angel investors, venture capital firms invest in startups in exchange for part ownership of the business. These firms often specialize in certain industries such as tech startups or healthcare startups.
Pros: VCs can provide large sums of money, advice, and prestige and since these are not loans you do not have to pay interest.
Cons: You will most likely have to give up a significant portion of your company to receive the funding.
Here at MoneyThumb, we strive to offer our readers the best advice and information available for their particular need. We hope this article with the 6 most common funding sources for small business has exceeded the expectations you had when you found this information.
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