Small businesses have a higher default risk than big business. Most of them collapse less than six years since they were established. Besides, it is difficult for small business owners to access credit compared to successful entrepreneurs. Small businesses have a complicated evaluation process since most of their data is inaccessible. In this post, we explore seven ways that investors can get funds for their small businesses.
Personal savings are the most common source of finance for startups. Investors can sell personal assets like jewelry, stocks or real estate to raise capital. Also, you can borrow a loan using them or sell the assets.
2. Small Business Loans
Certain financial institutions offer loans to small businesses. They include the SBA and the SIDBI. They focus on funding startups and small businesses that cannot access credit from popular banks.
Crowdfunding is one of the newest sources of funds for businesses. It involves borrowing small sums of money from large groups of people to raise funds. For example, an investor can ask people to invest $20. If 1000 people invest in a small business, they will raise $20,000. The funding is often done for particular projects. Small enterprises can make proposals that suit their capital requirements. Some investments in the online casino industry provide equity against the money they raise through crowdfunding while others take it on loan.
4. Private Equity Firms
Private equity refers to equity capital that stock exchanges don’t enlist. Private equity companies raise money from investors and use it to buy the capital of small businesses and promising startups. Normally, these firms need a controlling position in an enterprise to invest. So, you need to consult them when making major business decisions.
5. Venture Capital
Venture capitalists invest money in startups and small businesses that have the potential for monetary returns. Most capitalists seek a share of the equity a company has to invest in it. Also, they are determined to control some business operations.
6. Purchase Order Financing
Factors such as demand, supply, and seasonality affect the cash flow of all businesses. Some investments cannot place large orders due to insufficient funds. Purchase order financing would be a viable option in such a scenario. Purchase order financing firms offer funds to small businesses to help them buy essential materials. They collect money once a business produces and sells goods.
7. Family and Friends
It is easy to convince family and friends to lend you money, unlike banks. They might assess your credit score to determine your default risk. Typically, family members and close friends have low-interest rates. Some of them don’t charge any interest. More than 68 percent of small business owners borrow capital from family and friends, according to a 2015 study by Pepperdine University. It is advisable to pay the loan on time to avoid ending your relationship.
Starting a new business in Europe and the United States isn’t a piece of cake. It requires dedication, planning, and research. You need to assess different funding options to have consistent cash flow in your investment. Some of the most suitable sources of funds for small businesses include personal savings, venture capital, crowdfunding, private equity firms, and small business loans.