Financing a Small Startup Business

Finding capital to start you business can be quite challenging and unless you are prepared to invest your personal savings, if available, you will need to seek out external financing options. Great ideas are exciting but without funds, turning them into reality is impossible.

Where does the small business owner go to find funds to launch the business? Typically start-ups get their funds from personal savings, relatives and very close friends. These non-bank sources of funds are usually the only means available for startups since startups usually do not qualify for traditional bank loans.

So where can you go to find some financing? If your business needs up to $ 50,000 in funds then you may want to apply for the SBA Micro Loan. This program is easy to apply for and several banks offer this through the SBA program.  One caution, however. Since your business has no track record your personal credit score will be a big deciding factor for this loan. You will also have to sign a personal guarantee.

You could also apply for a business credit card. You can do this with the same bank you file the application for the SBA Micro loan.  Banks are now offering business credit cards with lines of credit up to $20,000. Again a solid personal credit score is required.

But there are also other alternative financing options available today for the small business owner.  In recent years “Peer to Peer” and “CrowdSourcing” financing alternatives have developed as a result of the internet. These concepts of financing are not new but now more easily available to access via the internet.

P2P financing requires that you list your idea on an internet site that offers this funding.  You will obviously need to be prepared to share your idea, business plan, purpose and amount of the loan needed and all the financial particulars. You will also need to demonstrate when and how you will repay the loan.  Returns to these individual investor/lenders are in the range of 9-12% in today’s market.  These are returns an investor cannot obtain in the stock market and hence the reason for the investment. The “Lending Club” is one site you can visit to get an idea of this concept.

“CrowdSourcing” is a group of individual investors that pool their money together via the internet and fund by aggregating vs. P2P which is individual to individual funding. Before the JOBS At of 2012 this was not possible unless the investor was an Accredited SEC Investor with at least $ 1Mn of assets. This opens up a new area of possibilities for the small business owner.

Most startups do not require a lot of financing and statistics show that $5,000-$25,000 is the amount needed by approximately 50% of small business startups.  This is not an insurmountable amount of financing to obtain and very doable.

It is wise to diversify your financing sources.  Spreading the debt gives you a better chance of dealing with any one debtor and increases your likelihood of success.

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