After compiling a business plan for your new enterprise, financing a small business venture is the next step to get your business on the go. There are a number of funding options to financing a business, so it is crucial to get an understanding of these various options and choose the right financing means for your needs. No business can start without some form of capital, and with a good business idea but no money to spend on starting it; you need to consider the financing options you have available.
To make money takes money, and raising capital to start a business is one the of most basic business activities. Because your business is just in the beginning, banks and other major lending institutions may not agree to handing out loans willy-nilly as they don’t know how successful your business will be. Here are some options to get you in the green:
Long Term Debt
Long term debt can be sourced from government sponsored programmes, commercial banks, private lenders and investment companies specialising in small businesses. A long term loan is one of the first avenues a new business should pursue to source capital for growth and development. Long term debt usually takes the form of a loan, with interest and the principal paid together in equal instalments over a long period of time until the balance has been paid.
Asset Based Financing
Asset based financing is a general term referring to a loan given out by a lender in exchange for accepting the assets of a business as collateral. This kind of lending has become more popular in recent years as an option of financing a small business venture. The assets that are set up as collateral against the loan are not usually inventory based, as these are more liquid assets. Rather, most loans that are asset based are financed against received accounts. Receivables are not susceptible to damage or other such problems and also liquidate in a relatively short period of time.
Companies who provide venture capital are professional investment companies which gather capital from a range of sources before investing in new businesses, even those that may not have a proven track record and may have high-risk tendencies. A venture capital firm will offer you start-up capital for your business in exchange for equity in the company. Where banks use past performances as lending criteria before agreeing to finance a business, venture capital companies will look to your company’s future prospects.
Lines of Credit
To keep out of the red, a company can use short term funds provided by a line of credit loan. When funds become available over time the business will repay the loan. Many commercial banks will offer a line of credit service, allowing for a fixed available amount. The line of credit will be reduced when payments are made.
Although their name may sound saintly, these investors will often demand high returns for the money they invest. Angel investors are private investors who are looking to make more returns on their investments than they would though traditional markets, such as public stocks or mutual funds. They will invest in your business in return for a degree of equity ownership. Compared to venture capitalists, these investors can be less demanding, depending on the individual.
To find a private investor, simply ask around within your circles and you can even approach the bank to ask if they have ay clients who may be interested. Professionals such as dentists, doctors and accountants often join occupational investment groups so be sure to enquire next time you go to get your teeth cleaned or your allergies cured.
Capital can be hard to hard to come by, particularly for small businesses, so be sure to approach a potential lender armed with a good business plan and business idea and use any connections you may have to spread the word seal the deal. Every business is a risk; but without risk, there can be no success.