When you have a small business, the important thing becomes funding it. Most entrepreneurs struggle with finding enough funding because they might not know which sources to tap for obtaining the funding. So, here are some ways to fund your business.
This is probably the most no-brainer option for funding. However, there are multiple elements within the business loan that you can use for your business. They are
SBA 8(a) Loans
The Small Business Association wing of the United States Government offers a business and training program for ownership on a diversity basis. 8a is a certification that is offered to small businesses for their overall growth. It is a nine-year business development program that offers training, counseling, marketing, and other forms of technical assistance to small businesses that have been certified. That means it is not just a certification but a complete program.
For eligibility for this program, SBA classifies African-Americans, Hispanic Americans, Asian Pacific Americans, Native Americans, and Subcontinent Asian Americans to be at a social and economic disadvantage. SBA would consider other individuals to show that they are disadvantaged due to race, ethnic origin, gender, physical handicap, long-term residence in an environment isolated from the mainstream of American society, or other similar cause.
Apart from those eligibility criteria, some other ones for individuals are
- Be owned by someone whose personal net worth is $250,000 or less.
- Be owned by someone whose average adjusted gross income for three years is $250,000 or less.
- Be owned by someone with $4 million or less in assets.
- Have the owner manage day-to-day operations and also make long-term decisions
- Have all its principals demonstrate good character
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Credit cards are reliable sources of funding, which means you can use them to meet your operational requirements. If you have a strong credit score, you will have a good credit limit on your card. The repayment schedule on your credit card is considerably long, making it a good way to obtain credit for a considerable amount of time. There are several potential drawbacks to the tactic of financing a business with credit cards:
- Interest rates on credit cards are often steep, so using them can be expensive. Interest charges on outstanding balances can pile up quickly.
- Carrying a balance that exceeds about 30% utilization of a card’s borrowing limit can lower your credit score.
If you want to avoid this hassle, you can always apply for a corporate card. Several programs allow for applying for a corporate card, even if you have a new business. When considering applications from a startup without a financial track record, card issuers must rely on the owners’ credit. So, it becomes more important than ever that you need to develop your credit score. When you have a good credit score, banks would be willing to offer you a higher credit limit.
You should remember that when you quit your regular employment to start your business, your ability to repay the credit suffers. Banks would be less inclined to offer you higher credit terms. This could work against you if you’re not careful. This is the quickest way to get funding for your small business
Personal is another way to get funding for your business. However, the problem with this is the high-interest rate that would be charged on the loans. When you’re applying for a personal loan, banks understand that they are not tied to the purchase of anything else. That will force them to charge higher interest rates on your loan. So, you should only use this when all other methods of financing are used up.
Venture Capitalists and Angel Investors
Venture capitalists invest in businesses at various stages of a business’s operations. These ventures give the money, the experience, networking, and other resources so that the businesses may grow. Typically these venture capitalists invest until their share has improved in the market and then exit. The exits are typically in the form of IPOs or MBOs. Either way, while angels are willing to help new businesses grow, venture capitalists only work with businesses to prove they have steady revenues pouring in. They typically put a five-year time frame on recouping their investment and don’t have time to coach or spur growth.
This is a relatively new method of funding that is slowly gaining momentum. In this method of funding, you put up a requirement on several crowdfunding websites and how much money you want to raise. People will view that and then contribute to your cause. It may not have seemed practical five or six years ago, but crowdfunding is a very popular form of financing today. And while it’s difficult for most businesses to gain traction via crowdfunding—especially if your products and services aren’t sexy and millennial-friendly—the potential benefits are huge. Websites like Kickstarter let you start a campaign, set a financing goal, and offer small rewards to people who give.
But you need to remember that crowdfunding can come with its troubles. Firstly, the crowdfunding websites take a chunk out of your earnings as their fee for hosting your campaign. In addition to that, it can become harrowing when you don’t deliver on your promises. So, before doing that, you need to check the fees and the policies that come with the campaign.
If you’re unsure how to draft your investment agreements, you can check our bundle of agreement templates. They are drafted by industry experts so that they stand the test of time and law. They are not only legally enforceable but cover all aspects of your funding requirements.