If you are thinking of forming a company, you have to prepare to face various hurdles. One of them is making important financial decisions. Starting a business costs money. Getting enough funding is among the first financial decisions you need to make as an entrepreneur. What you choose can affect the structure of your company and how you will run it.
However, there is no funding option suitable for all types of businesses. Each small business has different needs. You will have to consider your goals for your company to determine how much you will need. Once you figure out the amount of startup funding you will need, your next move is to figure out a source for your capital.
Here are some of the possible sources of funding for small businesses:
Asking from Friends or Family
One of the most common ways for aspiring entrepreneurs to get startup capital is to ask help from friends and family. These are people you trust who may be more willing to believe in your idea. Some may even be willing to lend you some money.
You may need to talk to some of your contacts to check if any of them are interested in investing in your business venture. If you plan on taking this approach, be careful to not let it ruin your relationships. It may also help to get legal advice.
Getting a Loan When Starting a Business
Another common way for someone starting a business to obtain funding is to borrow it through a loan. For example, you can apply for a Small Business Administration (SBA) loan. The SBA is a government agency that offers federally sponsored debt-financing programs. It makes it possible for an individual to get money for a small business. These types of loans often have easier standards of approval. At the same time, they also offer competitive terms and rates. The interest rate will vary depending on the size of the loan. Usually, smaller amounts of loans cost more.
Another option is to apply for a bank loan. Banks often provide short-, mid-, and long-term financing. If they approve your application, you can get financing for all the assets you need like the working capital, necessary equipment, and real estate. You have to ensure that your company can generate enough cash flow to return the principal amount and the interest payments.
There are also state and local economic development organizations. These organizations often offer low-interest rates for loans alongside a bank loan. Some of these development associations may not agree to finance your entire operation. However, they may help in getting access to other private funding sources. You may need to talk to your local chamber of commerce to find out if they offer such programs.
Going to Angel Investors or Venture Capitalists
Some individuals are open to funding opportunities when starting a business. Some of them are even more inclined to help startups and small businesses. If you think you have a solid business venture idea, you can propose it to potential investors. If you choose to source your capital from an investor, make sure you clarify the terms. Some of them may require you to give up a big percentage of the business.
Applying for Peer-to-Peer Loan
Another possible source of capital is a peer-to-peer loan. With this, you can borrow money from people who have excess money to lend. To facilitate a peer-to-peer loan, you will have to sign up for a lending network offering this program. Then, you will have to make a request and borrow money that you will have to pay regularly.
Tapping into Home Equity
People living in their homes for a certain amount of time have built up a huge amount of home equity. If you are in the same situation, you can try tapping into this equity with a loan or line of credit. You also need to pay this regularly.
You may also generate cash by selling some of your assets. For example, if you own valuable items, you can sell them to add to your capital.
Using your Savings
Many new entrepreneurs choose to save money while they are still employed. Then, once they raise enough, they will use it in starting a business.
Once you figure out the source of funding suitable for your small business, you will have to register it to the state. If you want to learn more about the process, contact DoMyLLC.