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Starting a business is an exciting endeavor. Every year, hundreds of thousands of people start businesses. While these businesses may be different, the fact that is common with all of them is that they all need money to finance the startup companies. Money is required to purchase equipment and inventory, to cover branding expenses, office rent and supplies, employee salaries and many other essential things. The most common place that entrepreneurs go to seek funds is from banks. If one has good credit ratings and a good business plan, most banks issue business loans to finance new businesses but they are not the only source of financing. Showing that you have sought financing from multiple sources shows potential investors that you have an entrepreneurial mindset. This article will discuss a few ways you can use to finance the start of your small business.
Save to start your business
The ideal way to fund your new business venture is to use your own money without the involvement of other parties or any complicated contractual obligations. You can find out the amount of money that you are going to need for the business to commence. Do not forget to include a budget for the projected period before the business breaks even and becomes self-sustainable. When you know the amount you need, you can split out the savings you make on your income and put money and accumulate it for the period until you have enough to kick-start operations. However, the problem with saving as a source of financing is that you are limited in the amount of money you can keep. It may take a long time before you are ready to start the business. Personal savings that are intended for retirement plans or life insurance amounts are also discouraged from being used in starting business ventures. This is because once used and the business fails then it will leave the entrepreneur without a plan for the future.
Outsourcing from friends and family
Many entrepreneurs seek money from friends and family members to support their business ideas. Some ask for equity investments and offer part of their company ownership in exchange for money to finance the business. Other entrepreneurs ask for ordinary business loans that they intend to pay up when the business catches on. The main problem with family and friends financing your business is that you risk affecting the relationship if the business fails and you are unable to raise the capital that the friend or a family member invested in your business. The other problem is you may end up getting a silent partner. People who offer you money naturally would like to have a say in the operations of the endeavor.
Angel investors
Angel investors are individuals or a group of individuals who invest in small businesses by making equity purchases. They provide the money required, expertise necessary and guidance to help start and grow the business. They do all this because they would like to see their investment prosper. The challenge is that getting an angel investor is quite difficult because they are very specific to the potential and viability of the business venture. They also require seeing a reasonable exit strategy in the event they opt to cash in on their investment and profits and part with the business. Angel investors are a spectacular option of funding especially when you find an investor with industry experience who can assist you with networking and other skills that ensure business success.
Business loans
These are the most commonly used financing options. Banks provide financing to run your business. They provide you with a set amount of money to be repaid throughout years. This money can be used for the purchase of required supplies and operational costs of the daily business activities. Business loans from banks are also not easy to come by since banks main interest is getting paid back. They would prefer to issue loans to businesses that already have a cash-flow from money they are already generating than start-up companies who only rely on a business plan and financial projections.
Purchase order financing
This is a special kind of financing where finance institutions or banks pay suppliers directly for orders that you have made and recover the amount from the sales made. This allows your business to large orders promptly. This is the perfect solution for smaller companies because it gives them the financial capacity to handle large orders.
Government grants and subsidies
Government agencies provide funding to businesses that are in specific fields that are in their development agenda. Fields like agribusiness and the information technology industry are the biggest beneficiaries of support from the government. This is because all governments are keen on food security and technological developments.
At finance homework answers you will find more information on the steps you can take to source for finances for your business.