Top Sources of Capital for Business Owners
Many entrepreneurs do not know where to acquire funding when starting out or expanding. If you know where to look, you'll find that there are many different sources for entrepreneurs to raise capital.
However, not every source of capital is suitable for every business. An entrepreneur should choose one which meets the capital structure that best fits their business. A business' capital structure is the way that it is funded, either through debt (loans) or equity (shares sold to investors) financing.
Financial backing usually includes loans, grants, or investor funding. Some of the top ways to raise capital are through angel investors, venture capitalists, government grants, and small business loans. There are other methods for financing such as credit cards or invoice financing, but these should be used only if you need cash quickly and know the risks involved.
Angel investors are generally individuals or groups who provide capital from their personal assets to assist you with starting your business. These types of investors are looking for startups that have good potential for earnings.
Since they are investors, you'll be expected to present them with a portfolio that is favorable. This differs from venture capitalists, who are more interested in organizations that are already doing well but need more sources of capital.
Venture capitalists (VCs) are usually groups of individuals that provide capital through an organization they have established. Generally, VCs like to fund companies that are already somewhat established, and in need of more finances. However, VCs have been known to sponsor startups that show significant promise.
VCs are looking for high returns on their investments (your business). This is not unusual for investors, but some VCs may want to be involved in your business decisions after they grant you some funding.
In the past, VCs have wanted to make decisions for the businesses they have funded to protect their investments. However, many VCs have moved to more of a mentor role, assisting you with business decisions and offering guidance as a protective measure. Ensure you enquire about the role a VC would like to have before you accept any funds.
If you do not find any suitable VCs, a small business loan may be the next option.
Small Business Loans
The Small Business Administration (SBA) has been established to assist business owners with their businesses. A small business loan through SBA partner lenders, while competitive, are guaranteed by the SBA and come with generally lower rates than traditional loans.
Small business loans are not the only form of government assistance. A source of capital often overlooked by entrepreneurs is government grants.
The government offers grants through the SBA to entrepreneurs who have research-related businesses. The most attractive benefit of a grant is that it is free and you won't need to repay the government.
Crowdfunding is a method of raising funds from individuals, using an internet-based platform. This method depends upon the generosity of people, and upon the exposure your crowdfunding campaign receives.
To have a successful crowdsourcing endeavor, you must be able to win the crowd's support. They'll want to know why you need the money and may want a reason to contribute. Create a reasonable monetary goal, and decide on a reward for the crowd that assists you. This could be public recognition for donations or letting them be the first ones to receive your product.
These are small loans designed for small businesses and startups. What makes these loans attractive is that they are short-term loans with low-interest rates compared to traditional small business loans.
Sometimes referred to as invoice advances, invoice factoring is a process where an entrepreneur agrees with a lender to sell their invoices due, and let the lender collect future payment by the customers.
This works by a lender purchasing your open invoices from you for a reduced amount, then collecting the amount that is due. For example, if you had a sale with receivables pending for $11,000 you could sell it to a lender who might buy it for $9,000. You receive cash, and the lender receives the $11,000 when it is paid.
This is a source of capital you might use if you were very much in need of capital, as you would lose $2,000 in the transaction.
Many companies use personal and business credit cards to finance immediate expenses. Credit cards are convenient when you don't have the cash to make purchases at the moment.
If you do not have the means to make your monthly payments, credit cards can exponentially increase your debt with high annual percentage rates.