One of the most challenging tasks for any startup is funding. All entrepreneurs need capital to open and develop their businesses. Financing is obtaining the financial resources needed to carry out economic activities. Usually, owners use different sources of financing depending on the stage of a business’s existence. Some ways to raise money are finding partners, taking out a loan at the online loans app, or radically changing a business model. However, there are a few other interesting ideas you might consider for your enterprise.
Possible Sources of Funding
Commercial banks, non-bank financial institutions (insurance companies, trust companies, investment funds), private companies, and state and regional programs may be external sources of business financing. Financing small and medium enterprises by issuing shares is not a common approach as the organizational and legal form of a joint-stock company is more typical for large, not small, enterprises. Depending on your needs, consider the following options:
If your business has grown to a significant size but still needs funding at this stage, or you are just starting, you may want to turn to investment funds. Why would anyone want to invest in your business? The answer is simple: investors who give tens of thousands of dollars to a company expect that it will be worth millions in the future. So, to get an investment, you need to develop a clear business plan if you don’t have one already.
Friends and Family
Money from relatives and friends is far from being the primary source of funding. But you can borrow a particular amount to create start-up capital or in exceptional cases. Such loans are often short-term, interest-free, and do not impact your accounts.
Another source of financing for small businesses is private company owners (private investors). In the United States, for example, about 30 thousand start-ups are financed this way. Private individuals usually use consulting services (accountants, financial and technical experts, lawyers) to manage their capital when making investment decisions.
Banks often have specific requirements for small businesses:
- A small business owner must invest 25 to 50 percent of their own funds in the project;
- Guarantees in the form of collateral are required;
- Banks may charge startups interest rates that are higher than those charged to large businesses.
Banks can provide short-term loans in case of temporary financial difficulties, while you may get medium-term loans to purchase equipment, cover current expenses, and make capital investments.
A bank loan can be secured (real estate), guaranteed (bank or third party), with other security (guarantee, insurance), or unguaranteed. For instance, 1) transfer of the right to lease (the bank grants a loan to the company and automatically receives the rent); 2) opening a deposit (the loan will be granted against a deposit); 3) using insurance contracts (the bank grants a loan secured by an insurance contract).
Small businesses are actively implementing trade credits, a form of credit that can be secured by the sale of goods, work, or services for which the seller grants a deferred payment.
There are some options for funding your business. Your choice should align with the company’s size and your plans. Most experts recommend choosing several sources and developing to attract investors.