Types of Business Funding
Funding a small business is not an easy task, however, there are various, effective ways to fund a small business such getting a business equipment loan. However, this article outlines other options of small business financing like bootstrapping, crowdfunding, debt funding and asset-based lending.
Bootstrapping is when a person begins his or her small company with little capital. Actually, bootstrapping is when a person attempts to create a company from his or her own personal finances or from the operating revenues of the new company. For example, a person could use their own finances such as from their savings account or their personal credit cards. Of course, this is risky and would require caution and maintaining careful records of spending.
Another way to fund a small business is by asking friends and family if they would like to invest in your company. However, they would have to know and understand that the money they invest in your company may not be returned. Before friends and family decide to do this, they should look at this investment as a loan that is freely given to you with no promise of the money being paid back to them. Of course, if your company succeeds, then some kind of reward for their kind gesture would be appropriate.
Another way to fund a small business is with crowdfunding. Crowdfunding is when many small investors provide small amounts of capital to help you finance your small business. To be clear, crowdfunding makes use of the accessibility of family, friends and others by using social media websites like LinkedIn. Crowdfunding is effective by getting the word out about your business and attracting potential investors. What makes crowdfunding workable for some is that it has the potential of expanding the numbers of investors.
Debt funding is still another way to fund a small business. Debt funding is when you borrow money that you pay back. It doesn’t matter if your company makes a profit or not, the money has to be repaid. An effective funding option is accounts receivable-based credit lines. This method of funding a small business works for some but only if there is a working capital gap between collecting payments and making payments. What this means is that you are taking out a loan on payments that are yet to be paid.
An asset loan is another way to fund your small business. This is a loan that serves as collateral by equipment. This is effective if you need a lot of capital equipment. Keep in mind, this kind of loan can also be obtained even if you are purchasing equipment that is not connected to the funding you receive. Then there is the SBA loan. The Small Business Administration guarantees bank loans, often with lower interest rates than loans that are not guaranteed by the SBA.
This kind of loan has to be paid back; however, what makes an SBA loan special is that you may be approved for a loan that you probably would not have received from other sources. In addition, they also have a great deal of information that is helpful such as counseling and mentoring, as well as helping entrepreneurs with marketing and technical problems.
Obtaining a grant is another method to fund a business. However, grants are normally given for specific purposes and businesses. The best sources for grant money are nonprofit organizations and state government agencies. There are two reasons why grants are favored by many; you don’t have to repay the money and it won’t swallow up your savings or business savings account.