Personal savings and small business loans from financial institutions are the traditional methods small business owners employ to finance a start-up or scale operations. However, access to the right financing will determine the sustainability and growth of SMEs. In addition, start-ups and small businesses face the challenge of getting favorable loan terms with mainstream banking institutions due to a lack of track record.
Whether you are starting a business in Europe, Latin America or Asia, there are certain common ways you can raise the funds to get your venture off the ground.
Listed below are a few interesting and effective financing options that do not involve cleaning out your bank account.
1. Family and Friends
Perhaps the fastest and most flexible way to get your hands on some money is by asking your loved ones to support your business. This is usually the best option for new ventures that are just entering the market. You can ask your family for a business loan with a set interest rate or treat the money they give you as an equity investment, which will essentially make them part owners of your company.
A word of warning here. Keep in mind that sometimes mixing family members and business can be a recipe for disaster. And if things do not go according to plan, such an arrangement can damage long-standing relationships.
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2. Bank Loans and Lines of Credit
This is a great option for those who have a good credit score, some collateral behind them or are able to convince their bank that they will be able to make regular repayments. Before you jump into this option, however, be sure to do your research and work out the best type of small business loan for your specific situation.
While a loan leaves you with a set amount of money, a line of credit is a slightly different beast, as it can be used at times when you need an influx of cash and in this respect is similar to a credit card.
On the downside, getting a bank loan or a line of credit can be tricky. The process can be very time-consuming with no guarantee that you will be successful in obtaining the financing you need.
3. Crowdfunding
Crowdfunding is all about putting your idea out there in the hope that people will find it interesting enough to make a donation. Provided that you can get enough people on board – each supplying you with a small amount of money – this can be a great way of raising funds.
GoFundMe, Kickstarter, Pebble, and Indiegogo are good examples of crowdfunding platforms that small business owners can leverage to raise capital to finance their businesses. Crowdfunding is a method of grassroots financing that brings together a large number of people, with each contributing relatively small amounts of money.
Crowdfunding is best suited for technological inventions with an immense appeal across different regions, as well as for end-user products and creative works. For instance, Glowforge, a 3D laser printing company, broke the record by raising $28 million within a month through Pebble crowdfunding.
One of the main advantages of crowdfunding is the ability to raise capital without giving up equity in your company. Also, through community backing, your product receives brand awareness and validation, with the added benefit of making pre-sales.
There are two types of crowdfunding. Loan-based crowdfunding where you will have to pay back your investors with interest. And investment-based crowdfunding where people buy a share of your business.
4. Angel Investors
Also called equity investors, angel investors are wealthy individuals – or groups – who buy shares in your company. Angel investors can also be a great way of obtaining business advice since they are often business people themselves. Better still, they see potential in your business, meaning that you must be on the right track.
The finance experts advise this is not the best way of raising funds for business owners who wish to retain full control of their company since angel investors are literally buying a part of your company. “It is important to remember that angel investor’s level of ownership of your company depends on the amount that they have invested. As such, be careful how much of your venture you actually hand over as you may end up being pushed out of your own business,” the platform states.
5. Government Grants and Funds
Governments have come up with funds and grants to support small businesses since they solve societal challenges such as unemployment and help boost economic growth. Government grants like Horizon Europe operate a 100 billion Euro fund to finance innovative and disruptive ideas. Similarly, the United States government runs the Small Business Technology Transfer, the American Seed Fund, and the Small Business Innovation Research Grant to support small businesses in carrying out research and commercializing their ideas. Besides, small business owners in America can access funding at the state level.
Taking advantage of the above-mentioned creative financing solutions enables business owners to raise sufficient capital and retain full ownership of their company.
Salman is a prolific environmental writer, and has authored more than 500 articles in reputed journals, magazines and websites. He is proactively engaged in creating mass awareness on renewable energy, waste management, sustainability and conservation all over the world.
Salman can be reached on salman@cleantechloops.com
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