Key Factors to Know About Small Business Financing

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Bringing a business idea to fruition requires vision, hard work, determination… and the funds to make your dream a reality. There are many expenses associated with starting and running a small company — including but not limited to equipment, inventory, payroll, insurance premiums, marketing and more.

How can entrepreneurs go about securing the funds needed to power their small businesses? Here are some of the key factors worth knowing bout small business financing options today.

Traditional Small Business Financing Options

The first thing most of us think when we hear financing is probably either a traditional loan from a bank or credit union or self-funding.

So-called “bootstrapping” involves using only your savings and revenue to float the business. The upside here is, of course, the lack of debt and the high degree of control over how money is spent. The challenge becomes trying to stay afloat using a limited amount of cash – and continually depending on using revenue to pour back into the business.

Getting a traditional loan typically requires good-to-great credit and may come with stipulations on what expenses are eligible for the funds. Some loans are more general, allowing entrepreneurs to apply them as needed to most or all costs that arise; others are more specific in what they will cover.

The primary advantage of loans is the healthy influx of cash when you need it most. The drawbacks include having to pay interest on the loan over time and the risk of defaulting.

Other Financing Options for Small Companies

Bootstrapping and traditional loans are often used to finance small businesses, but they are by no means the only strategies out there.

A few interesting alternatives include:

– Venture capital: You exchange a percentage of ownership of your business for capital, and maybe even mentoring or on-demand advice from an individual or a group.

– Angel investors: Angel investors are similar to venture capital groups in that they usually provide funds in exchange for part ownership. However, angel investors may agree to partner with less established companies and may offer more hands-on guidance.

– Crowdfunding: Have a product or service that you believe people will be excited about? Using the power of contributions from members of a crowd can be a collaborative way to raise the funds needed to launch your business.

Questions for Choosing a Small Business Financing Method

When you’re narrowing down financing methods for your current or future small business, asking some key questions can help you figure out which methods are a better fit for your needs.

How much money does my company need?

The amount needed will help guide you toward the best option. For instance, you may find you need more or less than a traditional loan can offer.

Can I qualify for a business loan?

Your credit rating, borrowing history and current debt levels will play major roles in whether you are able to get approved for a business loan — whether from a bank, credit union or online company. If you fall short of the minimum requirements to borrow, then it’s time to get creative and consider alternatives.

Do I want funds alone, or do I also want mentorship?

Some pathways result in funds with few or no strings attached. Others form more of a strategic partnership in which you get funds but also support from a venture capital firm or angel investor.

Knowing the full range of options when it comes to small business financing, both traditional and alternative, will help you make a sound decision about how to go about acquiring capital for your company when it’s time.

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