Tips for Financing a Small Business

Financing a small business might usually be thought of as mostly spending out of your own pocket to pay for start up costs and maintenance expenses. This might be true for some industries and niches that require only a small capital for investment. However, in some cases, you would have to secure financing from various sources to help start the business or expand an existing operation. Here are a few tips that can be helpful when securing financing.

Write a business plan and present it well

Investors, whoever they might be, would most definitely ask you for a business plan before they even consider your proposal for financing. A business plan should have short, medium and long-term goals for your company or venture, in which you should also have projections for revenues, sales and costs.

A business plan should also indicate how much involvement an investor would have in the everyday operations of your company. If you’re dealing with a bank, they’re usually hands-off. But if you’re dealing with a venture capitalist, they would sometimes require some degree of control. You should also incorporate an exit strategy when you seek financing. Bank financing would be simple, since it only requires that you pay off a loan. But if you partner with a venture capitalist, you might have to cash in on your company and cede control to them in five years’ time or so.

Approach friends and relatives

The first people you might wish to approach when financing a business would be your family, friends and relatives. While it might be a bit awkward to do so, these are people whom you might have an easier time convincing to lend or give you some cash to start your business. Be sure to be clear in your business plan about control, and possibly an exit strategy. Perhaps you can give them shares of equity in your company, and you definitely need to formalize any arrangements, for the protection of all parties.

Apply for grants or microlending

Another option for financing is applying for small business grants or small loans. City governments and non-profit organizations usually give grant financing to small businesses that promote social well-being and that help create jobs. Some cities and organizations also provide loans with very concessional terms, which mean they are more lenient than banks, and have smaller interest rates.

Angel investment

Another option is to approach an angel investor or venture capitalist. These are individuals or companies that finance startup companies based on the merits of business plans. Arguably, about 80% of start-ups fail, and investors know it. But they bank on the 20% that eventually succeed and make money from good ideas. Be prepared to have a proper exit plan when you sign up for angel investment. At the very least, be ready to cede or share control with investors, who will definitely want to have a say in big business decisions.

There are many ways to finance a small business. You can approach friends and family, or even seek financing from investors. What’s important to know is that you’re sure in the method you are financing your small business with. The degree of control and responsibility you have would vary from case to case.