Today I want to share a few thoughts on small business financing. If you are new to entrepreneurship, you may not be too familiar with terms like Venture Capital (VC) or Angel Investors. In this small business article, I want to briefly explain these terms and share with you a few creative ways to get the money you need to get your small business started or to take it to the next level.
As part of your business plan, you should consider how much money your business will need, when it will need that money, and how you are going to get it. This will help you stay focused and not be wasteful. Depending on the amount of money you need and when you need it, you may want to use various types of small business financing for your venture. The methods I list below certainly aren’t your only options for financing, but just a few of the main ones. Consider the following types of financing and their pros and cons:
Bootstrapping
This is when you start a business with only a minimal amount of capital (maybe a few thousand or even just a few hundred dollars) and continually reinvest the company’s earnings to provide additional capital investments. Bootstrapping is probably my favorite type of small business financing. This is because it lets the business grow naturally and keeps you, the business founder, in charge of the direction of the company. Bootstrapping means that the company grows and expands on its own without an outside infusion of capital. If you need something for the business, you have to wait until you generate enough money to buy it!
Friends and Family
Another way some small businesses get the capital they need to get start or expand quickly is through the entrepreneur’s network of friends and family. Although this may seem like an easy and safe route to take for small business financing, I issue an extremely harsh word of caution before you consider such a thing. Your friends and family are the most important relationships you have in your life and if by some means you are not able to repay the money, this can cause large problems in every area of your life. While there have been many example of friends going into business together where both friends succeeded, there are countless untold stories of business partners ruining their relationships because of failed businesses and unpaid debts.
VC (Venture Capital)
If you study business in school, say by getting your MBA (Masters in Business Administration) or even an undergraduate degree in Business Management, like me, you will learn about Venture Capitalists. My advice would be that if you have big plans for your little business and don’t want to be bossed around, you should seriously consider against going to a venture capitalist. That being said, VCs can still provide a good source of capital and great business skills and resources to help your business grow. However, they can be very demanding and very picky on which of all of the many businesses that are presented to them they will actually invest in. I’ll write a blog post later to expand on the world of VCs as this small paragraph certainly cannot do it justice.
Angel Investors
Many people new to entrepreneurship aren’t familiar with exactly what angel investors are. Many times Angel Investors work in small groups or networks and they invest their own money, as compared to Venture Capitalists who invest their investors’ money. Angel Investors typically invest less money than Venture Capitalists and don’t take on as much control but act more as advisers. Angel investing seems to be on the rise in recent years and is definitely a good source of small business financing.
Online Investing
OK, so this last area of financing is going to be one you may not hear about too often, but depending on your needs as a small business owner, could be extremely valuable. One website, Prosper.com, has set up a peer-to-peer marketplace where investors and borrowers meet. While the website isn’t restricted to purely business uses, many small business investments are made all the time. Prosper.com is a great alternative to getting money from friends and family and could be the answer you’re looking for.
I hope this helps answer some of your questions about how to obtain financing for your small business. As I have more time, I will expand further on these topics and provide more small business resources to connect you with small business financing. Let me know if you have any questions as I would be happy to answer them in upcoming articles!
(Image: Some rights reserved, Alan Cleaver.)
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