A How-to Guide to Funding Your Small Business

Small business owners know starting a business can be exciting. They also know it's a challenging venture. One of the many hurdles entrepreneurs must cross while starting a small business is funding.

Without capital, your business remains just an idea. With sufficient funding, you can put together all you need for the company, including equipment, technology, office space, and employees.

Considering starting a small business? Here are the different types of business funding and how you can prepare yourself to get these funds.

1. Bank Loans

Bank loans are a primary way to obtain funding for your business. One significant benefit of bank loans over other funding strategies is that you'll have access to a large amount of funding. However, the requirements to obtain loans from banks can be strict.

Banks typically require a detailed business plan, documents containing the business' financial projections over five years, an expense sheet, high credit scores, and collateral. Some banks also require you to invest some parts of your personal funds into the company to show commitment.

That said, while considering banks for a loan, you should either opt for your personal bank (since they're familiar with your financial history) or a bank that has a track record of funding small businesses.

2. Lines of Credit

Lines of credit are loans from banks or other financial institutions that have a specific and limited amount of money that you can borrow when you need it and repay over time, usually throughout an unscheduled period.

These loans typically begin charging interest immediately you borrow them; however, since there's no defined schedule for repayment, interest calculations are complex, and you may not be able to predict how much you'll pay back eventually.

Also, you'll need approval from your bank to access a line of credit, and this approval depends on your credit score.

3. Business Credit

Cards Credit cards are another funding option to consider. You can obtain a business credit card for business related purchases so you won’t have to use your personal credit card to pay for business costs.

The downside? Credit cards often have high-interest rates that could skyrocket your debt balance. A high debt balance could eventually be detrimental to your business.

If you intend to fund your firm with a business credit card, opt for a card that has the lowest possible interest rates and realistic repayment terms.

4. Private Loans

Private loans involve funding from friends and family. However, while it might seem like an informal funding strategy, it helps to obtain these loans formally, such as drafting a written contract and other documents that show your investors the projections and risks involved in the business.

Why? Because businesses fail and the resulting losses can hurt friendships and family ties. As such, your investors need to know what they're getting into before deciding to fund your company.

Your written contract should also contain the amount you need, the interest rate, and the repayment plan.

5. Equity Funding

Equity funding includes venture capitalists and angel investors. These investors typically offer a financial contribution to the business in exchange for ownership in the company.

They're also focused on high-growth businesses with potential for high-profit yields. Furthermore, these investments have longer timelines than traditional funding strategies.

You'll need a highly profitable business idea and an excellent business plan with projections on profit returns to secure this type of funding.

Conclusion

Securing funding for a small business is tricky, but necessary. However, since limited financing options are available, you can opt for a strategy that best suits you, depending on how much you need, the financial projections for the business, and your repayment plan.

Before you start to look for funding for your business, make sure you've done due diligence and covered all the basics regarding the business to ensure you're not taking on too much risk at a time.

Are you planning to obtain funding for your business? Work with us to make sure your business is legally protected and ready to receive outside funding. Schedule a call today at www.manningcarroll.com.