Is starting a business your dream? If your answer is yes, then it is important you understand these 3 key sources of finance : debt, equity and grants.
There are lots of small business ideas that need few dollars, however some ideas need more money. You will agree with me that not every one of us has the resources to fund a business on our own. Whether you are looking to boost your existing small business or cover your startup capital, these sources of finance could be of help:
Sources of finance:
- Personal Savings – If you have a dream of setting your small business, it important you start savings towards it.
- Grow the Business Organically – this is called ‘boot strapping’. This means growing the business without leveraging on the external lenders. “Boot strappers” usually rely on personal income, sweat equity or lowest possible operating costs. It works well for small business and service consultants where there are little or no up startup cost.
- Loan from Family and Friends – Your friends and family can be cheap sources of finance for your small business or startup. This can even be easier when they believe you to be an honest and passionate person. Do a proper business plan and present it to them. You have to ensure that both parties benefit from the relationship e.g offer them share in the company or interest if it is a loan. It is important you put the agreement in writing.
- Angel Investors – Risk takers who are willing to invest on excellent ideas and most of them will ask for a share of the company. They are mostly high net worth individuals.
- Venture Capitalist – formally managed funds that focus on supplying capital to startups or expanding companies. They also demand significant ownership.
- Government grants – government and some non-government organization offer support to startup or small business in a form of grants. Check with your local business support centers.
- Buy Inventories on Credit – Ask your suppliers to give you the starting stocks or inventories on credit. This works better for a trading or manufacturing business.
- Receivable Factoring – Sell your account receivables (debtors) to financing companies at discount. This is can be with or without recourse.
- Credit card financing – Use your credit to buy some items. It is very expensive but not illegal.
- Crowd funding campaign – An online market in most developed countries where entrepreneurs and innovators can raise funds. The famous names include Kickstarter.com, Indiegogo.com, and GoFundMe.com .
- Peer to peer loan – In some countries, certain industries have lending club where members lend to each other’s. This became popular when bankers cut lending during the financial crisis.
The above sources of finance can be group into three:
An award of financial assistance in the form of money by government (federal, state or local) to an eligible grantees with no expectation that the funds will be paid back. Grant funds are usually restricted to specific audiences or conditions. For example government can give a grant provided you will set up the business in certain remote area or you will employ a number of indigenous people. Some grants focus on agriculture, research, education etc.
You sell part of the ownership in your company to the person who gave you the capital. Dividend or return is only paid when the company made enough profit. Unlike interest, shareholders cannot close the business if you have not paid any dividend.
You borrow money and pay interest and the principal at an agreed time. It is generally cheaper than equity funding. However, lenders usually requires the owner to provide collateral as a guarantee to the loan. The business can be liquidated if you fail to pay interest or principal. Furthermore, if the company is not a limited liability company lenders can call on the owner to pay any outstanding balance the business could not pay.
You don’t always need a loan from a bank to start or grow your small business. You have other sources of finance like borrow from family and friends or develop a proper savings towards it.
Your comments are welcome