The biggest excuse which people give for why they are not in business is that they don’t have capital. True, you need capital to start and operate your business. You need rent for the premises of your business, you need raw materials, inputs and equipment for your business, you need to hire staff and market your business. Thus, everything you need to do to turn your business idea into a viable business requires money. Most entrepreneurs ask the question: How do I finance my small business? This article outlines 7 ways for raising capital to start your business.
1) Personal Savings/ Bootstrapping
Bootstrapping is whereby you fund the business from your own personal funds. Your personal savings are a good place start when looking for capital to fund your small business. You should start saving now if you don’t have savings. A year down the line, you will have a starting point for funding your business. Other investors cannot put money in your business when you have not contributed anything.
Come up with a savings plan, save a certain percentage e.g. 20% of your salary/income towards start-up capital for your business. Starting a business is about sacrifice and so you should reduce your expenses as far as possible and save the cash, you’ll be glad you did. Open a savings account with a reputable bank. Be disciplined. Cut your expenses. Yes, with proper planning you can do it. It will take time, but it’s worth it. A year from now you will wish you had started today.
2) Friends and Relatives
To start your small business, you may look to private financing sources such as parents, relatives and friends. The financing maybe informs of equity financing or debt financing. If it’s equity financing, they will own a certain percentage of your business. As for debt financing, you will have to repay the money over time. Most parents are willing to support their children to start a business.
However, to avoid problems, these investments should be made with the same formality as to other external investments. There ought to be an agreement on the terms and conditions of the funding, and you should fulfill your own part of the deal.
Some companies and individuals are in the business of investing in young and privately held businesses. They provide equity capital to young businesses in exchange for a ownership stake of the business. This is called venture capital.
However, venture capital companies usually don’t fund “ideas” or businesses which have not started to operate. They prefer to invest which are already operating and are already profitable. So, may consider this option for funding your growth strategy.
Angel investors are wealthy individuals or businesses that provide capital for starting a business, usually in exchange for convertible debt or ownership equity. Angels investors usually invest their own money, unlike venture capitalists who manage the pooled money from many investors.
The objective of angel investors may be more than just focusing on economic returns, as they will have a somewhat of a mission focus. Angel investors may be interested in the economic development of a specific business industry, or a specific geographic area in which they are located. They can also offer mentoring or advice alongside capital. However, they are still interested in profitability and security for their investment. To get angel investors, you need strong networking at many business functions where you can try to befriend the wealthy.
5)Banks and Other Commercial Lenders
Banks and other commercial lenders are popular sources of business financing for small businesses. To get debt financing, your small business ought to have a solid business plan, positive track record, and collateral. If you are starting a small business, you may not be able to meet some of the requirements, especially if you don’t have collateral. However, in some countries, it is easy to get a small business loan.
Once you have started operating your business, and you have your set of financial statements which prove that your business is financially sound, then your company may be able to borrow additional funds. Be careful of the terms of the borrowing, as high interest rates are not good for your small business. If you can’t access a small business loan, then you may consider taking a personal loan e.g. a salary based loan to fund the starting of your business.
One of the modern way of raising capital for a business is through crowdfunding. Crowdfunding is whereby you fund your business venture or project by raising small amounts of capital from a large number of people, usually via the internet. Crowdfunding brings investors and entrepreneurs together by making use of easy accessibility of huge networks of people through social media and crowdfunding websites. In return for funding your business, the investors get some rewards e.g. they will get the products you will sell in return for their investment, or they get a gift for their investment. The advantages of crowd funding is that along with getting capital for your business, it can also generate interest and hence help in the marketing of your business before you even launch.
Some governments give financing to small businesses in various industries. The government will be promoting the starting and growth of businesses for the economic development of the country. Government small business loans usually have favorable terms e.g. low interest rates, and no stringent requirements for collateral. You need to make inquiries and find out whether your government has such kind of programs.
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