As a small business owner, you will eventually require additional capital to expand further. You may need funds to purchase more inventory, set up a new store, establish a manufacturing facility, or introduce a new product line. Whatever your business goals are, capital infusion could be the only thing preventing your enterprise from reaching the next phase of growth.
But what options are available to raise capital for your small business? Let’s explore 5 Simple Ways to Find Capital for Small Enterprises.
There are several funding methods you can use for your expansion projects. However, they all have advantages and drawbacks. Therefore, carefully weighing them up is critical when determining the options best aligned with your unique needs and circumstances.
Chances are, you have already invested your own money in your business. There is no harm in assessing whether you can at least partially fund your latest capital requirements, too, with some of your savings.
Self-funding business expansions have several benefits. The most significant is the ability to retain control and ownership. It is also cheaper compared to interest-paying debt.
Moreover, self-funding demonstrates your commitment to making your enterprise a success—an important factor when you are attempting to attract investors.
However, this approach has a few downsides as well. Opportunity cost is one. Taking money from your savings may not incur any additional expenses for you. But it could have generated income in an IRA or some other investment product. That is the opportunity cost of investing your savings in your enterprise. And if your business idea fails, you could end up losing your money.
Funds from Loved Ones
Your friends and family know you better than anyone else. They understand your strengths, weaknesses, skills, knowledge, and expertise. Having supported you on your entrepreneurial journey, your loved ones will be your biggest supporters. They will know what you are capable of achieving and will have absolute faith in you and your business.
So, why not check whether they are willing to invest in your company? They could provide equity and become a co-owner or offer funding in the form of a loan, which you can repay over an agreed period with interest.
This funding approach has a few vital upsides. When you are partnering with or borrowing from people you already know, you need not worry about being misled, deceived, or exploited.
Getting loved ones to infuse capital is also an excellent way to attract new investors. Those who can provide funding would be more inclined to join in when others have already shown enough confidence to invest in your business.
However, working with friends and family could get messy sometimes. It may even lead to severed relationships and unpleasant arrangements. It is important to understand these potential risks before taking this funding route.
Always treat such capital infusions as any other business dealing—be fair to all parties, have an in-depth discussion about terms and expectations, and put things in writing with formal documentation.
Small Business Loans
Bank loans, microloans, and other borrowing options could also provide much-needed funds for your business.
A detailed business plan and financial projections are generally essential prerequisites for applying for small business credit. They enable lenders to understand the level of risk involved when lending to you.
A primary advantage of this funding option is that it allows entrepreneurs to retain ownership of their businesses. Having said that, it is still a costly route to take.
You need to ensure you are able to repay the loan with interest during the agreed borrowing period. Failure to do so could lead to penalty fees and the seizure of collateral. It could also affect your business credit rating and personal credit score and cause irreparable damage to your company’s reputation.
Obtaining a business loan could also be challenging. A bank, for instance, may expect you to have been in business for a specified minimum period. There could be minimum credit score requirements and various other criteria, too, to qualify a company for a loan.
Moreover, terms and interest rates will vastly vary between lenders. So, researching and reviewing your options is essential. Loans provided by the U.S. Small Business Administration (SBA), for instance, would typically have more small business-friendly terms than those offered by traditional banks.
High-net-worth individuals often invest in businesses with growth potential by providing venture capital. However, they will expect a share of ownership and control in return due to the substantial risk they need to bear.
On the upside, these investors are less risk averse, more willing to bet on small businesses, and often interested in getting involved for a longer period compared to traditional lending institutes.
But remember, sharing ownership of your business with a total stranger is a major decision you do not want to take lightly. You must take every measure possible to avoid scammers and rogue investors and select someone you can build a mutually beneficial partnership with in the long term.
So, before you approach private investors, find out more about them. Google their names, search for them on PhoneHistory to compare the information provided on other resources, and check their LinkedIn profiles. Look for shared contacts in your social circles and reach out to them for a recommendation.
Research and spend enough time to understand what they look for in an investment and the type of businesses they favor. If possible, get in touch with some of the enterprises they have already invested in to learn more.
With $50.3 billion raised in peer-to-peer business lending, crowdfunding is an interesting yet simple approach to raise capital for your small business. It is an excellent option to get funding with the help of a large number of contributors, each making a small donation. You typically would not need to pay them back, although some may expect a reward in the form of a product sample or public recognition.
Naturally, you can’t expect to raise substantial capital using this method. However, it will give you access to cheap funding.
Whichever capital infusion method you select, first identify how much you need and for what specific purposes. Prepare a business plan and pitch deck by considering the needs of investors and lenders. Provide compelling reasons to invest or lend. And ensure all projections are backed by numbers.