Ideas often don’t transpire into businesses because of paucity of funds.
You not only need funds to start a business, but need it till the time the business is self sufficient to meet its own expenses.
Funding need not always come from a single source. It depends on the business model, projections and several similar factors which help decide which sources of funds to consider.
To help you optimize your chances of raising capital, we have listed six signs to watch out for when you are looking for a source of funding to start your small business.
Related Article: Will Work for Funding: 7 Ways to Finance Your First Small Business
1. Scale and Scope of Your Business
If you are willing to share a part of your business, then angel investors may be the way to go. They would typically be ready to invest anywhere between $10,000 - $750,000.
However, few things to consider here are:
- These are not suitable or viable for investments below $10,000 or more than $750,000.
- You should be prepared to give up some of the control along with a share of your business, as well.
- There is less structural support from business angels than from an investing company.
- Last, but not the least, you may be required to make money from the business by selling it off at a later stage.
Small Business Administration (SBA) Loans are U.S. government-backed term loans that are available at most banks and commercial lending institutions. The SBA’s primary lending program, the 7(a) Loan Program guarantees up to 85 percent of loans up to $150,000 and 75 percent of loans of more than $150,000. The maximum loan amount is $5 million.
But the flip side of it, however, is one needs to be prepared for time-consuming paperwork and bureaucracy surrounding SBA Loans. So, unless you have ample amount of time at your disposal, this may not be your option.
One way to counter that would be to opt for SBA Express program, which promises a 36-hour turnaround in return for only guaranteeing half of a loan’s value.
Related Article: 5 Reliable Tips for Selecting the Right Business Loan
3. Certainty of Return on Investment
Business bank loans are the most common avenues of business finances, but are tough to come through as banks need a sort of reassurance that the money will be repaid in the stipulated time. Tom Caesar of the Positive Lending Solutions, who is familiar with the process on how most banks operate when dealing with small business loands, he suggested that since banks have a lot of terms and conditions which borrowers needs to abide by, he recommended checking the following:
- You will be able to demonstrate a clear line of path for your business and that includes a transparent plan of repayment.
- There will be a return on Investment; and even be prepared to put up collateral. Collateral is a security of sorts, something you are willing to lose if you are unable to repay the loan. This security in most cases is a personal asset, and not something you would buy with the loan amount.
- You are prepared for loan covenants that can be asked by some banks. These are a series of terms and conditions that you need to stick to, failing which you will be asked to repay the loan immediately.
4. Quality and Credibility of Your Business Plan
Alternative financing options such as crowdfunding and crowd lending are increasingly gaining popularity these days. While both refer to borrowing money from strangers/external investors, the money received by the former method is to be exchanged for shares in the company; the latter is a way of raising debt finance, that is, money that has to be repaid according to agreed terms and conditions, just like a bank loan.
One has to keep in mind that both these kinds of financing are speculative in nature. As a result, you need to lay down your proposition clearly in front of the investors. If you have a structured, detailed, accurate, realistic, professional and compelling business plan, you may start to look at this alternative mode of financing.
5. Long-Term Viability
If the small business you own has a long-term viability and professionally prepared financial statements coupled with robust reporting systems, commonly sold inventory, and customers with a good payment history, you could opt for asset-based business loan.
Asset-based loans are based on assets, generally accounts receivable and inventory, that are used as collateral. Asset-based lenders will typically advance funds based on an agreed percentage of the secured assets' value.
Long term viability of your business is also critical here because an Asset-based loan would also cost more than traditional loans. Interest rates greatly vary between different banks. Your business should be able to provide for such an additional cost.
Related Article: Capital Continues to Elude Small Businesses: What Can be Done?
6. Strong Personal Network
Last, but not the least, your friends and family might be a source of funding for your business if there is no risk of strained relationships and losing friends. Such an investment could be in the form of a gift, a loan or an equity investment in the business. Partnering with such an investor also may prove to be beneficial in some cases.