How to Finance a Business
Having a good business idea does not guarantee entrepreneurial success. Knowing how to finance a business and understanding the expenses involved with starting a business lays the foundation for opening its doors. Finding ways to gain financing to assist you with covering those expenses gives your new business a fighting chance for survival. Here are some of the best places to find financing for your new business.
Family and Friends
The easiest form of lending to acquire comes from those closest to you. Presenting your new business idea to your family and friends has proven a great starting point for many aspiring entrepreneurs. With family and friends, having them as investors in your business can be tricky. Due to their close relationship, they may feel the need to impart any advice they deem worthy. It is up to you to inform them of the investor relationship you expect from them if they provide you with financing for your new business. Establishing this early on will help alleviate any future questions concerning how active they should be as investors.
Angel Investors and Venture Capitalists
Angel investors and venture capitalists provide excellent funding opportunities for a viable start-up business. Both angel investors and venture capitalists expect you to thoroughly understand the business and how it will make a profit. These investors may not have specific experience pertaining to your business, but they know how to value an investment. Also, these professional investors want to maximize the return on their investment. In their attempt to do this, they may require a large controlling interest in your new business in exchange for funding. Negotiate this point to ensure you do not lose control of your venture.
Banks and Credit Unions
Loans and lines of credit from a bank can help to get your business up and running. Banks also provide credit cards that can assist you with your new business start-up. When acquiring debt funding, be aware of the cost of the debt, or its interest rate. Your interest rate will be determined from your creditworthiness. Also, debt secured with collateral will be less expensive than unsecured debt. Consider these facts when ascertaining whether debt financing is right for your new business.
Peer-to-Peer Lending, Crowdfunding and Microloans
Peer-to-peer lending, business crowdfunding sites such as Fundable, and microloan platforms are relatively new avenues for small businesses to secure financing beyond the traditional paths of friends, angels, and banks. Creditworthiness and profit potential can be determining factors for receiving funding through peer-to-peer lending and microloan programs. For all three options, financing may also be awarded because of factors not traditionally considered, such as the potential for societal improvement.
Funding is available to help you start and run your new business. Being prepared by knowing the competitive environment in which you will do business and showing the profitability of your venture gives you the best chance to receive financing. No matter whether you are approaching a friend, a bank, or a professional investor, you want to put your best foot forward when presenting your case for your new business. Show them that the opportunity is viable and that it will provide them with a strong return on their investment.
Remember it is important that this is only general discussion and you should seek professional advice from advisers specific to your circumstances.