The Entrepreneur’s Guide to Funding a Small Business

Entrepreneurs have the capability to identify the potential of a product or invention and pull together the capital, talent, and other resources to transform these ideas into commercially worthwhile innovations. They have the determination, belief and creative vision to develop, shape, manage, and execute business on many levels.

However, there are some huge steps involved in setting up a successful business. For starters, you have to conduct precise research into your potential products, analyze your competitors, develop a marketing plan, and figure out how to finance all of it.

Any business no matter how big or small its ambitions, need to find the best source of funding, which will depend on how much capital you need, and when you need it. The wide variety of funding options available can make it difficult to choose the ideal one. Banks won’t often come to your rescue, so many entrepreneurs seek out other funding options.

Here are a few major funding options for small businesses:

Personal Investment 

Why not invest your own savings into your business? Doing so can eliminate the burden that comes with borrowing finances from another party. But the advantage of this type of investment can work against it as well, as self-funding involves placing most (or all) of the risk with the business owner. This kind of investment gives you complete control over the business, but it can also wipe you out if things don’t work as you’d expected.

Friends and Family

When exploring options for funding, many entrepreneurs look to their social and circles to see if anyone can provide monetary assistance. This option can bring in money faster and offer more flexible payment methods. However, the drawbacks are similar to self-funding. Money problems can ruin even the best friendships or family relationships, so a business downturn can bring stress from all angles if your investors are people you’ll see after leaving work.

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Crowdfunding

With crowdfunding, you can secure money from a number of people connected to various online platforms. On such platforms, you pitch your ideas to complete strangers, which often require a compelling marketing-based approach to fundraising. Crowdfunding is mostly used to attract new investors for innovative or creative businesses with a focus on specific products, like tech hardware or board games.

Factoring/ Invoice advances

Many businesses that already have clients or customers will probably have times when finances are tight while waiting for those clients to pay their bills. For those with long delays between invoicing and collecting payment, there are two options to get the money faster: invoice factoring and purchase order financing. In such arrangements, a funding provider will front much of the money owed on invoices that have been billed out, with any remaining balance often collected by the provider directly from the client company. This way, a business can ensure it has enough cash on hand to keep working while waiting for customers to pay outstanding invoices.

Grants

The SBA offers grants through the SBIR – Small Business Innovation Research, and STTR – Small Business Technology Transfer – programs. It is mandatory that receivers of these grants meet federal research and development goals and possess a high possibility for commercialization. For these reasons, very few businesses can obtain such grants. However, they can be critical for small technology-focused startups with big ideas.

Equity Financing

In order to attain capital via equity financing, an entrepreneur has to give up part of their ownership in their business. The entrepreneur goes into partnership with the financier or investor, with the latter acquiring an equity position, or even outright ownership of the business.

Venture Capital

Venture capital is a specific type of equity financing focusing on startups. Venture investors will invest a considerable amount of money in exchange for equity in the business, expecting to obtain huge returns after the business eventually goes public or is taken over by another company. Venture capitalists invest in businesses they believe will someday be worth many times the value of their investment. These investors will also help develop the business by offering expertise and mentor-ship, which in turn creates more opportunities for entrepreneurs to grow.

You can also read:

• Sources of funds for your Business
• Types of Equity Financing for small Business

Author Bio

Edward DeAngelis has been helping entrepreneurs by providing capital assistance since 2013. He is a lifelong entrepreneur himself, with three decades of business success in multiple industries. He is the founder and CEO of Amerifi, an alternative lender based in suburban Philadelphia.