For many, the dream of owning a small business is held up when it comes time to fund operations. Finding money for a small business can be difficult right now, with the economy struggling, and many banks reluctant to take a chance on small businesses. If you are looking for sources of income for your small business, here’s where to start:
Small Business Administration (SBA) Loans
The Small Business Administration (SBA) offers the opportunity to receive funding for your dream. Loans are available for up to $750,000, but the amount you are approved for depends on availability of funds, and how the lender views your needs and your application. In order to receive the SBA loan, you have to go through a traditional lender. Basically, SBA loans work a lot like FHA loans offered to home buyers. The SBA insures the loans in order to reduce the risk to lenders, so that they will be more willing to lend.
When applying for a SBA loan, you will need to provide information on your personal background, a business plan, your personal credit report, and even a business credit report. Financial statements, tax returns, and legal documents related to your business are all usually required. You might also be required to provide collateral. Each lending institution has its own loan application guidelines, so call ahead of time to find out what you need.
Friends and Family
Ask your friends and family if they can help you with seed money. You can offer to provide free products in return, ownership in the company, or some other reward (such as a job for your niece if your brother helps out). In some cases, friends and family will lend you money at a lower rate of interest than you can get elsewhere.
An angel investor is usually one person, or a small group of people who provide the capital for your small business. Angel investors usually expect you to provide them with ownership equity or some other financial reward like bonds or convertible debt. In this way it is somewhat similar to venture capital, in which you are provided an infusion of cash in return for offering shares in your company. When the shares go public, an investor can make money off the IPO by selling the shares, or you can buy the shares from the investor at some point. The idea, though, is that at some point the investor receives a return on his or her investment.
Increasingly, P2P lending is being used for a variety of purposes. P2P sites like Lending Club and Prosper can help you find lenders for your small business funding needs. Investors can offer you loans in $25 increments. Lending Club provides loans of up to $35,000, and Prosper allows you to borrow up to $25,000. Unlike more traditional business loans, though, these are unsecured loans so you don’t have to worry about collateral. Investors are welcome to purchase as many notes as they like, for $25 each, from a borrower. Interest rates are often competitive – especially if you have good credit. Rates start as low as 6.59%, which is quite good for an unsecured loan. The third-party site handles everything, so you make only one monthly payment and the money is distributed to your lenders.
P2P lending allows you to tap into funds provided by several people, rather than relying on a single vendor. It’s worth noting that Kiva, the microloan site for developing nations, has partnered with Visa to provide small businesses with similar loans in the United States. Whenever you apply for P2P microloan funding, it helps to have a business plan that you can share with potential investors. You will be more likely to receive the funding you need if you can prove that you have a success plan for your business. This is important because if you don’t reach your funding goal, you don’t get any of the money. It’s strictly all or nothing.
You can also raise money with the help of crowdfunding. However, instead of borrowing the funds, you receive the money and give something to investors in return. Kickstarter, one of the most popular crowdfunding web sites, is primarily for artists, filmmakers, musicians, designers, writers, illustrators, explorers, curators, performers, and others to bring their projects, events, and dreams to life. Crowdfunding sites like Kickstarter don’t provide loans, so you don’t have to worry about repaying with interest. You can ask for virtually any amount of money to fund your project. Kickstarter launched in 2008, and thousands of projects have been approved. Similar sites also provide you with the opportunity to fund a particular project or start up.
There are two types of crowdfunding that you can use to raise money for your small business:
- Gifts in return for donations: Someone who supports your small business receives some type of gift or recognition. You can offer a free product or service, or some other gift. In many cases, this type of crowdfunding is an all or nothing proposition: If you don’t reach your goal, you don’t get any of the money. Kickstarter is a good example of this type of crowdfunding.
- Equity: The equity model of crowdfunding requires that you provide interest in your company – usually in the form of shares – to those who are willing to pitch in. When the time comes to cash in, investors expect a portion of the profits
Like P2P lending, crowdfunding involves numerous smaller investors. It’s almost the opposite of angel or venture capital funding, where fewer investors offer larger amounts of money.
No matter how you attempt to raise the capital for your small business, you will have to find a way to attract investors. In order to impress a potential investor, whether you are raising money on Kickstarter, making a presentation to venture capitalists, or asking the local bank for an SBA loan, you need a solid business idea, and a plan to go with it. If you have some sort of experience in the field, including managerial or executive experience, that helps as well. Expertise shows that you truly do understand what you are talking about, and that you have the connections and ability to create a successful business.
Before you start looking for funding, create a plan for your business. Your plan should include the organization of your company, how you plan to meet various benchmarks, what you offer, and how you plan to market your products or services. Polish your presentation, and prove your idea is a good one – and that you are capable of executing it – and you will be more likely to attract people willing to take a chance on your small business.