Financing resources for small business start-ups
What is a small business? Just like you, we are equally confused. Anyway, our confusion is not based on absolute lack of knowledge but on the different meanings given to this word by different jurisdictions. In the United States, for example, a small business means one that has less than 100 employees while in Europe it means one with less than fifty employees.
Sources Of Financing For Small Business
Many investors, both startups and these already in it, will most likely find themselves in this group. But as far as capital is concerned, the big investor and the small investor may need to answer the same question: what are the sources of financing a business? Although the list of sources of financing a business may be endless, only a few may be relevant to a discussion that is focusing on a small business.
Broadly speaking, financing may be equity based or debt based. Equity involves the “sell” of an owners’ stake in the business while debt financing basically means that the business person will borrow from lending institutions. The following are modes of equity financing explained in brief:
Angel financing as a source of finance for small businesses means that an investor will approach individuals with the financial ability and the willingness to invest in the particular industry that is the startups idea. Angel investors may include your friends, family or these persons to whom you have been referred. In fact, most countries have angel associations that a small business can present its business proposal for funding.
Venture capitalists have existed for a long time as a source of financing businesses. They operate under the same principles as angel investors while the only difference is that these will usually invest in risky ventures. The downside of these investors is that they may want to exert control in the management of the small business through selection of professional managers from their pool of experts.
- Corporate venture capitalists
These are companies whose main purpose is securing interests in start ups and existing businesses. Just like angels and venture capitalists, they expect high returns for their investments. They may want to have a stake in the management of the small business.
Debt financing of a small business
As a source of business financing, start ups can decide to borrow from lending institutions which include commercial banks. Loans from these lenders may be secured or unsecured depending on the agreement arrived at with the lender. Unsecured loans mean that the borrower is not required to deposit security with the bank while secured means the banker will need collateral before advancing any amounts.
It is critical for the business owner to understand the true terms of the loan before signing loan agreements. In fact, CPA’s and lawyers will assist to perfect the loan instruments, if any.
Small investors who possess personal savings do not have to look for any other sources of financing a small business. Indeed, this source has been widely used by many start ups for the reason that it preserves the independence of the small business owner.
Although these are the conventional methods, other simpler methods exist including factoring and advance pay programs. A visit to a financial adviser for detailed discussions on the sources of finance available to the small business will be of great help.
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