How to Finance Small Business Ventures

As a small business owner, your objective is to upgrade your venture from one level to another. Small businesses always want to become well-known brands within a short period of time. That can only happen if you work hard and stay patient. Otherwise, you may not achieve your goal.

Although a business may be small, it has many expenses that the owner should take care of. For instance, you should pay your employees at the right time. Additionally, clients should always find the commodities they need from your venture. Otherwise, you may lose them to your competitors. All these expenses require funds.

As a small business, it may be hard to obtain enough financing because of different reasons. For instance, such businesses don’t have a proven track record and the assets available have low value and may not act as collateral for conventional financing options such as bank loans. Most financial institutions prefer to offer loans to large firms as they consider them safe investments. It is hard for small businesses to prosper because of inadequate financing.

What are the funding options available for small business owners? Here are the top ones you can consider if you intend to set up or expand your venture:

Use Your Savings to Fund the Business Venture

Most entrepreneurs use their savings to establish a business and finance most of its operations. It is one of the best sources of financing if you have enough money. One of the pros of using this source is that you can control your business whichever way you like. You don’t have to impress investors.

However, saving for a business venture isn’t easy. You have to stay disciplined and determined to make it. Ensure you set aside a given percentage of your earning every month without fail. That means there are luxuries you may have to give up. There are cases where you may realize that your savings are not enough to operate the business.

Angel Investment Business Funding Option

Most people do not understand how angel investment works. Angel investors are successful entrepreneurs who are willing to invest in businesses and get a stake in return. As a small business owner, you must pitch the business idea to them. The angels only invest money in your business if they are convinced it is worth it. In most cases, they fund businesses for between 5% and 30% stake in the venture.

It is an ideal source of small business funding in a case where you need not a very large amount of money. Additionally, angels offer mentorship to small business owners. However, they don’t engage in the daily operations of your business.

While angels finance businesses individually, there are cases where they operate as a syndicate. Even in the case of a syndicate, you have a specific ‘lead angel’ to deal with. The angel financing option is available to any business owner, but investors always prefer to invest in companies with high growth potential, such as technological start-ups. To increase your chances of obtaining business funds, understand your business, work on your business presentation skills, demonstrate that you are an excellent business manager, and create a genuine rapport with potential business financiers.

Pros

• You don’t repay the funds
• The angel offers expert mentoring
• Increases business credibility making it easy to obtain more funds in the future

Cons

• You share the business stake with investors
• The angels may determine how you operate your venture

Venture Capital (VC) as a Source of Small Business Funding

In venture capital funding, investors, also called venture capitalists, own a stake in the business and offer funds in return. The portion of the venture they take depends on the value of the business. These investors are more likely to finance a business with a huge potential to grow.

With this type of funding, the business doesn’t need to own physical assets. Venture capitalists finance ideas with huge growth potential. Additionally, the investors offer expert guidance on how to run the business venture. After the venture grows to a particular level, the investors “exit” from the company, which means they sell their stake.

Pros

• The business can enjoy huge funding
• Your business becomes more credible
• Increases the ability of the business to get more investors in the future
• You receive guidance from the venture capitalists

Cons

• You share the business stake with investors
• The venture capitalists may steer the business in a direction you don’t like
• You have to share business returns with the venture capitalists

Funds from Family Members and Friends

Family, friends and other close associates can also fund your business. In this case, you are likely to obtain the funds quickly because of the close relationship you may have with them. They may not assess the ability of your venture to grow. It is a good source of funding if you want to grow your business to a point where you can convince other investors to assist you. They may not avail huge funds.

Pros

• You can obtain the funds quickly
• Flexible funding terms

Cons

• The investors do not evaluate the potential of your business
• They may not offer business guidance

Financing a Small Business Through Bank Loans

Banks also offer loans that small businesses can use as their source of funding. In the case of a secured loan, an asset like property acts as loan security. The bank seizes and sells this property if you are unable to repay the loan amount. When using unsecured loans you are expected to give a personal guarantee of paying the loan in case the business is unable to. Unsecured loans attract more interest compared to the secured ones since they are riskier.

Each lender has its unique requirements when issuing business loans. However, they all need business plans and favorable credit scores to issue the loans. Experts at MyFin recommend that you should not opt for a bank loan if your business doesn’t have enough assets to act as security. You should consider other sources of small business financing.

Pros of bank loans

• You can choose loan repayment terms that suit you
• The fixed monthly repayment terms mean you can plan
• You can receive huge funds from a single source

Cons

• For secured loans, you need an asset(s) to act as security
• Missed payment attract huge bank charges
• Defaults negatively affect your credit scores making it hard for you to obtain funds in the future

FAQs About Small Business Financing

Small business owners have many questions about financing. What are the most appropriate responses?

Which Specific industries qualify for financing

Provided your business is profit-oriented and offer huge returns, financiers are always willing to listen. Determine the source that suits your business.

Do I always need a business plan to obtain funds?

For specific sources such as loans and angel financing, a business plan is necessary. However, you may not need a plan for funds from friends.

What is the Best time to obtain external funding?

At any point your business needs more funds, go for it. Enough funds facilitate fast growth of your venture.