How do small businesses fund themselves
The investment in a small business can seem difficult for the entrepreneurs at times, and they will find a need to struggle to get the funding at the beginning of days. So how do they manage to get funding? Well, there are two ways to fund a business from external means- equity and debt.
Equity requires the owner to turn over an ownership stake to an investor to receive the funding respective of a deal. Equity does not require any repayments, and the only drawback is losing the total ownership over the business. Let us look at the forms of equity through which small businesses afford an investment.
The internet has become a platform for people to pitch their ideas to investors around the world. There are several websites which offer crowdfunding for the startups to be successful. But we have to be careful in choosing the right funders to have a fair deal on the equity, and so the cloud funding is also limited to some levels.
The people who are willing to invest in businesses are today forming groups to connect with people. These firms contribute to the funds of small businesses in the exchange to some part of the ownership in the business. They focus on funding to the businesses budding in their local areas.
Partners & Friends
A partner can be a member of your family or a friend or colleague. If the idea is good, then people can show up to become partners by investing their money. Most of the time, the partner shares equal ownership of the company but may or may not be employed in the business. However, if the business fails, it can lead to tension buildup, which is not good between friends and family.
Debt requires the entrepreneur to request money in return of a promise to repay the amount in a specific time with added interest. Debt does not provide any sort of ownership for the lender over the business, but there will be the obligation to repay the loan in time, failing which can result in the liquidation of the company. There are three ways to take a loan to small businesses.
Small Business Lenders
There are plenty of associations in the market who are willing to lend money to small businesses in exchange for profitable returns. Lenders demand the loan to be secured by assets of some type and high return rates.
Small Business Administrations are headed by the business leaders in the market who are willing to lend money through various programs. The loan requires a guarantee that the loan will be repaid and this is where the skills and ideas of the small businesses provide the surety.
Small Business loans are available in all traditional banks. Anyone can get a loan based on their credibility. A person should have enough assets to assure the banks that the money can be recovered if the business fails.