If you have a vision for a business or product, turning it into reality can be quite time-consuming and challenging. Obtaining adequate funding would be the biggest hurdle you must overcome. 20% of businesses fail within their first year of operations. Lack of funding is one of the most common reasons why. However, if you have an idea for a startup or a small business in its initial stages of growth, there are plenty of ways to obtain funding to get things started.
Obtain Funding for Their Small Business
Here are three ways entrepreneurs can fund their businesses:
A bank loan is one of the most common ways you can fund your startup. One way banks fund businesses is through a form of debt financing, working capital loans. It is a loan that is enough to run one complete cycle of revenue-generating operations in a business. It’s important to note that working capital loans and a business owner’s personal credit score are linked. So missed payments or defaults would directly negatively affect the credit score. A benefit of working capital loans is that it is a form of debt financing, and not equity financing, so the ownership rights of the business won’t have to be shared.
Government-backed, low-interest-rate small business loans are another funding option. The U.S Small Business Administration guarantees them, which means that if you fail to repay the amount to the lender on time, SBA will pay the rest. They guarantee 85% of a loan up to $150,000 and 75% for even larger loans. The application process for an SBA loan is time-consuming, and the approval time is also long. So SBA loans are a good option if you’re not looking for immediate funding.
The Small Business Administration also offers grants to small businesses that minorities, women, and veterans run. If you fit into one of these categories, check with your local SBA office to see if you’re eligible for a grant. Tech entrepreneurs can significantly benefit from these grants, as these startup grants are more readily available for medicine, science, and technology-related industries.
Investments from angel investors or venture capital investments are another way to get funding. Both are equity investments, meaning business owners must share a percentage of their business’s ownership with the investor.
Angel investors are individuals with a large amount of cash interested in investing in startups or small businesses in their early stages of growth. They usually expect up to 30% equity and provide individuals with capital loans, advice, and mentoring for their businesses. Angel investors have helped start many prominent companies, for example, Google, Alibaba, and Yahoo.
Venture capital funds through venture capital firms are another source of financing. These firms invest in startups and businesses in the early stages of growth if they see a high potential for success. These investors usually want to regain their investment within three to five years. If you have a product that takes longer than that to get into the market, venture capitalists may not be interested in your business.
Bootstrapping Your Business
It can be challenging for first-time entrepreneurs to obtain funding without their businesses running and showing potential for success. So if your financing requirements are small, bootstrapping, or self-funding, your business can be one of the most effective ways to get started.
You can invest from your savings or get family and friends to contribute. Bootstrapping can be a quick and hassle-free way to raise money as it does not involve the formalities of obtaining funding from established financial institutions. Family and friends are also usually flexible with the interest rates, so the cost of raising money is also low.
If you have an idea for a business or a small business in its growth, the chances for failure are high without adequate funding. Fortunately, there are ways you can overcome this challenge. You can either obtain loans from a bank or loans backed by the SBA. You can also check with the SBA to see if you’re eligible for grants. Angel or venture capital investors can invest in your business as well, though it is a form of equity investment. One of the quickest ways is to invest your savings or ask your family and friends to contribute.
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