Common Sources of Financing for Small Business

EDITOR'S COMMENTS:

This article explores the different options available for Home Business or Small Business Start up financing. This is a good article to keep as a quick guide for your start up.

The choice of financing is an important determinant of whether a product reaches the market, or whether an existing business can survive. The choice of financing is an important part of being an entrepreneur and business owner, and the ability to raise cash when you have no or limited history takes skill and creativity. There are a number of sources of financing. The suitability of the alternatives depends on what stage you are at, and will change as the company matures from stage to stage. The following outlines the most typical forms available.

Yourself, Family and Friends The most obvious and common start is for people to self finance. That means they either draw down on their savings or they use personal debt such as credit cards, credit lines or equity mortgages to finance their business. Family and friends are often used as a source of financing. Although they are not always in a position to properly evaluate the business venture, family and friends have long-time relationships and experience with the entrepreneur and are knowledgeable about his/her reliability and ability.

Strategic Partner Strategic partners can not only provide a source of financing, but often they can provide an area of expertise that the entrepreneur does not bring to the table, such as operational or marketing skills. Naturally, the pitfall of a partner is that you do not maintain full control over the company and that sometimes there is a falling out between the partners. So it is important that you do your homework and choose your partner carefully.

Angel Financing Angles tend to be freelance financers interested in loaning smaller amounts of money, say between $50,000 -$500,000. They can often provide the seed capital required to develop an idea to get to the point where a firm can obtain formal financing. Angel investors will also invest in growing companies that may have a strong revenue base, but are not yet established enough to get bank or other financing. Another benefit of Angels is that they can bring a lot of experience and industry contacts to the table.

Venture Capital When firms approach venture capitalists, they are generally developed to the point where a venture capitalist can add value. The venture capitalists will generally sit on the board of directors, provide expertise and provide funding based on the attainment of milestones. They are generally interested in firms that can generate rapid growth - and returns - over a few short years; your time horizon is generally 3-8 years.

Trade Credit One of the largest sources of short-tem financing, trade credit occurs whenever you purchase from a supplier but do not need to pay for the merchandise for 30 days (or whatever the terms are). Trade credit can be expensive if you are foregoing discounts, but a new firm may not have much of a choice.

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