Although this is a difficult economic time for everyone, it is also a great time to take the plunge and finally launch the small business you’ve always dreamed about. Turning a startup into a successful business is no easy task. It’s a long road, packed with obstacles, and even smart entrepreneurs with great ideas and even better products can fail more often than not. And the reason most businesses fail is a lack of proper financing. It takes money to make money, and your small business must have enough capital to get off the ground while building a base of consumers, or you could find yourself on the edge of success without the means to push things over the edge. So it is essential that you include coming up with a financing strategy in your initial business planning. Here are five of the top options for financing a small business.
One of the first directions many entrepreneurs turn that is often the key to launching a business is financing through friends and family. Most people have some college friends who went on to strike it rich, or a wealthy older relative sitting on a pile of liquid capital. If you can convince one or more of these sources to come in as partners in your business, you’ve got a great alternative to traditional financing, with its complicated contracts and steep interest rates. Personal contacts may be willing to look at your business plan long before you can convince a bank to take you seriously, and the funds will often be immediately available. Of course, your personal relationships are basically the collateral for this financing option. If things go south, love can be lost in a hurry.
Homeowners looking to launch a business often use a home equity loan for initial financing. As long as you have equity in your house your chance of approval will be very high, and the interest rates are lower than those from business loans. All this is well and good, but if your business goes under, you will lose not only your career dream, but your house as well. Foreclosure could put your entire family at risk, and that’s a lot of stress to take on at once.
To avoid that fate, some entrepreneurs will seek out angel investors to help launch a small business. Angel investors get involved at the early stages of a company’s launch. They invest not only for the money, but because they are passionate about the vision behind the business. Angel investors were responsible for launching businesses like Yahoo and Costco, and will look for a 25% return while wielding no creative or business control. It’s a great situation if you can find the right fit, and that perfect fit is important.
Another similar financing option is connecting with venture capitalists. These people generally look for a small business that has already surpassed the initial startup, and has shown promise and immediate revenues. They bring a great deal of money in with them, and often are experienced managers that can also provide some valuable insight. However, venture capitalists are often not invested for the long haul. They’ll want to be making money within three-to-five years, and if you cannot show that is possible, you’ll have a difficult time bringing any of these types on board.
Finally, consider going in a more structured direction by applying for a Small Business Administration Loan. In some ways it is similar to business financing from Kabbage.com, in that you’ll fill out an application to secure the capital needed to launch. You’ll have access to the level of financing only a bank can provide, and you’ll have a long time in which to repay the loan. Watch out for interest rates, though. You usually can’t lock them in, meaning what you agree to now could be vastly different a couple years down the line.