Financing Options for First Time Business Owners
Getting a new business off the ground takes capital, and entrepreneurs have many options for finding start-up funds. In the past, approaching a bank for cash may have been the only choice if an entrepreneur didn’t have the money to launch a business. Now, a wide array of resources are available to assist new business owners. Explore your financing options to find the one that best fits your needs.
Conventional Business Loan
With a conventional business loan, the business owner borrows money and repays it with interest. The loan term might be more or less than one year, but it will be a fixed period with fixed interest rates. The lender often requires some type of collateral to secure the loan in case of default. This type of loan does not involve the lender gaining any ownership of the business. A business owner can obtain this type of loan from a conventional bank, a savings and loan, a credit union, or a finance company.
Small-business loans can help entrepreneurs finance a business venture. SBA loans offer financing options for people who may not qualify for a conventional business loan. These loan programs are designed specifically for launching or expanding a small business, and the qualification requirements are different from those of traditional bank loans. The entrepreneur would fill out a SBA loan application, which also involves an SBA guarantee. The guarantee stipulates a specific portion of the small-business loan that the U.S. Small Business Administration would repay if a default occurs.
Crowdfunding is a cutting-edge way to access funds for a business venture. With crowdfunding, an entrepreneur approaches potential investors via the Internet, pitching the business idea or the project to attract people who might invest in a collective effort to provide funding. Entrepreneurs set a funding goal and present their business idea to potential investors. After that goal is met, the funds are released to the entrepreneur. Often, the investors will receive a token of appreciation from the business owner, such as a free service or product. Crowdfunding can be debt-based or donation-based. With debt-based crowdfunding, the business owner must repay the funds. With donation-based crowdfunding, people donate money to the project without being repaid.
Government grants are available to help small-business owners get their venture started. Because these funds come from citizens’ tax dollars, the government has stringent compliance requirements to ensure that the funds are dispersed wisely. The federal government makes grants available to nonprofit ventures and educational institutions. The federal government also allocates funds to state and local governments, and these entities manage individual grant programs. Grants are often structured to match funds that a business owner has, ensuring that the entrepreneur does their part to contribute to the financial stability of the project. To receive a grant, a business owner must apply for it, and an approval process follows.
Many small-business owners turn to credit cards as a way to finance a new company. Before using a credit card to finance small-business expenses, an entrepreneur must do research to understand the potential ramifications. For example, when financing a sole proprietorship, any credit card debt incurred for business expenses will fall to the owner, which could impact their personal credit score. Incorporating a business can insulate a business owner from this liability, but laws vary from state to state.
Some business owners pursue equity capital as another option for raising funds. With equity capital, the business owner offers a share of ownership in the company or the opportunity for an investor to take an active role in the company in exchange for financial backing. Investors may own shares of stock, or they might receive the option of converting another financial instrument into stock. Investors may seek this type of investment with new private companies that are expected to grow quickly. Although this type of investment carries risk, an investor may also require some type of collateral to reduce the risk.