Top 8 Sources of Financing for Small Businesses

JohnTaylor April 18, 2013 0

Getting your small business off the ground is going to take funding – money for products or equipment, money for employees, money for business licenses, money for marketing, etc. While some small businesses only require a tiny amount of capital up front, particularly home-based businesses, other small businesses may require a substantial investment.

According to the Wells Fargo bank, the average small business owner spends about $10,000 in start-up costs. More than half of the small business owners surveyed by Wells Fargo told researchers that they would have had an easier time of starting their business if they had more access to funding.

In the current economic environment, getting a loan for a new business venture can be difficult, as traditional lenders have become extremely risk averse. If you’re a first time business owner, and if your current income or credit is less than stellar, you may have a very hard time in convincing a bank to lend you the start up capital you need to get your business off the ground. There are a number of alternatives to traditional bank loans for your new business, however.

Consider the following alternatives to traditional bank loans when searching for funding to start a new small business.

1. Credit cards – If you only need a small amount of start-up capital or if you’ll be able to repay the borrowed money quickly from immediate sales, credit cards can provide a good source of start-up funding for businesses, particularly for entrepreneurs who may have difficulty obtaining credit from traditional lenders. Beware of high interest rates and over-the-limit fees, however.

2. Family – Family members can provide start-up funding for businesses, and may often be a cheaper and better source of funding than banks or lenders. If you get family support for your business, be sure that the terms of the funding (whether it’s a gift or a loan, etc.) are clearly spelled out and understood by all parties as money disputes can often ruin family relationships.

3. Partners – If you have a great idea for a business, but don’t have the capital to get it off the ground, you may want to consider taking on a partner. A business partner can help provide you with capital, or may improve your chances of securing a loan from a bank or other lender. Make sure to get your partnership agreement in writing and vet your potential partner before taking him or her on, however, as a bad partner can sink your business just as quickly as a lack of start-up capital can.

4. Investors – Another way of raising capital for your small business is by selling an ownership stake to an outside investor. Investors can provide capital, and those with business experience can provide expert advice. Understand, however, that selling an investor ownership stake also gives them a seat at the table and a voice in business decisions. It also could potentially open you up to lawsuits if the business founders or if the investor doesn’t like the direction you’re taking the business. Also, if you end up needing more money the investor could end up buying a larger and larger share from you until he or she is the majority owner. Before selling a stake in ownership, be sure you and your investor share similar visions for your business and do a little due diligence and check out your investor’s track record.

5. Asset sales – If you have a small business concept you really believe in, and a tangible asset you can mortgage or sell for capital, this is another means of raising money for a new business venture. Steve Jobs helped start Apple by selling of a Volkswagen bus he owned, and today the company is worth billions. Assets you can sell or put up for loan collateral include investments, vehicles, land – really, pretty much any tangible asset of significant value.

6. Small Business Administration loans – The SBA makes a number of loans available to entrepreneurs in order to spur certain business activities desired by the government, such as investment in disadvantaged communities. To find out if your small business could be eligible for a SBA loan, contact the Small Business Administration or contact your bank.

7. Mortgages – Start-up capital for your new business can be obtained by refinancing your home and borrowing against the equity in your home. Most people’s homes are their most valuable asset, and present a source of capital for ventures such as starting a business or providing for their children’s college education. However, if you are going to tap the equity in your home to obtain financing for your business, be wary of the terms of the loan you’re getting and also have a back-up plan to help you pay off the debt in case the worst happens and your business founders.

8. Credit unions – Credit unions exist to help consumers take out loans for homes and cars and to help small businesses get off the ground. Because of their mission, and their status as non-profit financial institutions, they may be more willing to make small business loans than traditional lenders such as banks. And chances are that you’ll be able to obtain a loan at a lower rate than you would be able to get from a bank. To get a loan from a credit union, you’ll need to be a member, but in most cases membership is obtainable by just opening an account with a nominal amount of money.

When taking advantage of a non-traditional source of funding for your business, always be sure to be crystal clear on the terms of your loan, partnership, investment, etc. Also get the agreement in writing, if possible. Making sure all terms are clear from the beginning is key to avoiding problems later, whether your business is successful or not.

You can also find funding flexibility in starting your new business by finding costs you can cut or delay and by starting off the business on a smaller scale. With careful business management and cost control, and creative financing decisions, you can find the money you need to prime the pump for your new business.

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