10 Ways You Can Finance Your Small Business

Saturday, August 25, 2012

10 Ways You Can Finance Your Small Business

If you're thinking of starting up your own small business but don't know how to finance your dream, don't despair. There are many ways to finance a small business.

1.      Friends and Family

If you have friends or family who are reasonably wealthy, you can ask them to help finance your business. You won't need to have an exemplary credit score if you finance your business through friends and family. On the downside, if your business goes sideways it may sour your relationship with your lender.

2.      Use a Credit Card

You can use a credit card with a high spending limit to help finance your new small business. Credit cards are relatively easy to obtain and do not require you to present your business plan in front of a banker or investor. Credit cards also carry very high interest rates.

3.      Take Out a Home Equity Loan

If you own your own home, you can take out a home equity loan to finance your new business. As a secured loan, a home equity loan is relatively easy to obtain and typically carries a lower interest rate. However, if you are unable to repay the loan, you risk losing your home.

4.      Cash Out Your Retirement Policy

If you've been investing in a 401(k) plan or some other retirement policy, you can try to cash out your investment early to finance a business. Cashing out your policy carries one huge advantage: You do not have to repay anyone. Before you cash out your policy, familiarize yourself with your policy's rules; you may have to pay considerable financial penalties to cash out a policy early.

5.      Small Business Administration Loan

Some banks offer Small Business Administration loans, or SBA loans; these loans are largely backed by Small Business Administration, giving you the advantages of a secured loan without having to secure the loan yourself. However, SBA loans are by nature variable loans; your interest rate may change from year to year.

6.      Partner with a Strategic Investor

A strategic investor will partner with your business, providing cash, expertise and connections to your business. Acquiring a strategic investor can provide your business with resources usually reserved for long-established businesses. On the downside, you'll have to cede some amount of control to your strategic investor.

7.      Find an Angel Investor

Angel investors are well-funded private citizens or small groups that provide initial capital in return for an ownership stake in your company. Angel investors typically allow you free rein to run your business and may offer you guidance as your business grows. Unless your business has a high growth potential, you may have trouble attracting an angel investor.

8.      Attract a Venture Capitalist

Venture capitalists can be very effective sources of financial aid. Venture capitalists can provide budding businesses with literally millions of investment dollars. However, in return for their investments, venture capitalists will put your company on a very short leash.

9.      Crowdsourcing

Websites such as Kickstarter provide a new source of investment capital: the millions of people who use the Internet. These websites allow you to acquire thousands of smaller investments, adding up to a very large sum. As attractive as crowdsourcing sounds, you may not have much success with it unless you are a savvy marketer.

10.  Grants

Grants are an excellent source of financing. Grants do not need to be repaid, giving your business free seed money to grow on. Most grants are the subject of fierce competition; additionally, grants are only available for certain types of companies. High-tech companies are the most common grant recipients.

About the author:

Aaron Sherman writes on business strategies and also on planning successful business meetings.


Unknown said...

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Finance Magazine said...

Thank you Lisa.

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