What Are the Main Types of Funding Options for Small Businesses?
It’s rare that a first-time entrepreneur is able to get a business up and running without some outside finding. After achieving success, it becomes easier to self-fund new ventures. That first success is critical, though, and as the old saying goes, no man is an island. If you’re going to find success in a new small business, it’s wise to consider the variety of funding options available to you. All of them involve some degree of financial risk, and that’s just the nature of the game. Some methods are far more dangerous than others, though. Before putting your future on the line in the name of profit, weigh the relative advantages.
This option includes standard savings accounts, piggy banks, cash under the mattress, and even 401Ks, if you follow the IRS rules. Pulling your startup funds from these sources may be an attractive option. You have to consider, of course, that any business failure could destroy your retirement plans. Choosing this option involves potentially catastrophic personal risk, but it also means that you are accountable only to yourself and your family, and need not necessarily worry about incurring huge debts.
This is another common, but seriously risky option. Credit cards can provide a new startup with a fast infusion of cash. They can help get business owners out of small jams and strengthen cash flow temporarily. However, they also create the risk of damaging your credit score if you use them more often than you can afford to pay back effectively. Minimum payments leave you at the mercy of the lenders for long stretches of time, and missed payments destroy your credit. The drawbacks usually outweigh the advantages, unless you’re disciplined in their use.
Among the better-known funding options, commercial loans from banking institutions are a pillar of both modern and ancient commerce. Lending standards can be strict, and the institution will often require the loan recipient to offer personal property or assets as collateral for a startup. That makes this option similarly risky to using personal savings. If you have a solid business plan, though, this can be an effective option for securing larger funding amounts.
The U.S. Federal Government has programs in place to offer loans for starting or growing small businesses. The U.S. Small Business Administration is the largest federal source of funds for enterprises across the country. They work with many commercial lenders to guarantee loans for ventures that those lenders might not otherwise want to fund.
This is rapidly becoming one of the most popular funding options. It can be a highly effective way to build brand visibility while still in the product development stage. By convincing potential customers to help make the product a reality, you can hit the ground running as soon as the product comes online. It doesn’t offer the kind of ROI that commercial lenders expect, so you’re not likely to raise very large sums this way. A good rule of thumb is that the more creatively your product proposes to solve a problem, the better your shot here.
Angel Investors and Private Equity
These guys are the talk of the tech world right now. Silicon Valley is known almost as much for the people who invest in technology solutions as the solutions themselves. Most often, such investors will expect to receive an ownership stake in your company in exchange for very large funding sums. In effect, they join you as an experienced and motivated partner. You’ll surrender some control, but if they ask for it, that’s a good thing. Angel investors and private equity firms engage almost exclusively with ventures whose organization and ideas instill confidence in a good return. To secure this kind of funding, you need to be an expert in your market, even if you’re just starting out. Gaining their funding means you’ve gained the trust of people who know how to make money and spend it well.
Boomsourcing’s solutions are a critical resource for any small business trying to secure any of these funding options. We help our clients scale their operations more cost-effectively and with higher quality results. Contact us today to strengthen your business plan!