Small business funding is one of the most difficult aspects to start up for new businesses. With the economy the way it is, there are not many people buying into small business startup ideas. This leaves entrepreneurs with a difficult decision on where to go for capital raising. The two main options available to entrepreneurs are traditional bank loans or debt. Which one should you choose?
Banks are not the only option for small businesses seeking small business funding. Private lenders can provide additional funding sources. In most cases, they are more willing to lend to start ups as they have less to lose. They usually set their lending limits according to the projected success rate of the company so they are less likely to get defaulted on Small business funding.
The traditional place to look for start-up business loans is in the local newspaper, with start-up business plan competitions, or through investment firms. Unfortunately, most of these opportunities are hit or miss. Most start-ups never make it past the first year. Banks may still be willing to finance a small business but the interest rates will most likely be very high and most likely be based solely on the personal credit history of the business owners. Small business plan competitions are hit or miss at best.
There are many other options available for small business funding. Start-up companies looking for funding can find it by submitting their qualifications to government agencies such as the Small Business Administration and Small Business Development Centers. These organizations review and select companies that are qualified to receive federal grants. These grants are typically not taxable income and thus are not required to be returned. However, the companies have to pay an application fee and a percentage of the winning amount back to the government. There are also private foundations that provide start-up capital to businesses that qualify.
Many start-ups don’t have the means to obtain traditional financing. So the government offers start-up loans, business credit cards, and small business funding options to help those who are willing to start. However, there’s one important note: these loans require the business to have a concrete business plan that can be presented to investors during the course of the loan process. Private lenders won’t be as forgiving if the start-up company doesn’t follow through with the repayment plan. In some cases, there are no other options, so it’s imperative that start-ups understand the value of good financial planning.
Internet entrepreneurs often prefer to find funding in angel investor networks. The downside to this approach is that most angel investors are wealthy individuals who are willing to accept high risk. In order to find reliable and qualified individuals, entrepreneurs should perform due diligence by checking with the Better Business Bureau, consulting with attorneys, and talking with local bankers and investors. Small business funding options that use web technology to give entrepreneurs access to multiple lenders at once are becoming increasingly popular among innovative entrepreneurs. However, web-based financing can be time consuming and difficult for beginners.
There are also two other options for small business funding: loan programs and grant programs. Loan programs are offered by both the federal government and private organizations, and they can be quite competitive. When applying for a loan program, entrepreneurs need to demonstrate the ability to repay the loan as well as meet strict requirements for creditworthiness. On the other hand, grant programs are awarded on the basis of need. Because there is no need to repay grants, they carry a lower interest rate and therefore tend to have a shorter repayment period.
Small business funding companies may offer a third funding source: customized start-up loans. This type of service allows entrepreneurs to assemble customized business plans for each grant they submit. They can then tailor the plan to meet the criteria of each grant, including their projected cash flow, level of risk, and ability to pay the cash back.