Thousands of Americans dream of starting a small business. In fact, according to the latest figures from the Small Business Administration (SBA), 234,000 businesses opened in the second quarter of 2015.
All of these businesses have one thing in common: money. Raising enough funds is critical to growing your small business and creating the conditions for longevity and future success.
1. Savings
According to Forbes, most startup founders use their personal savings to fund their businesses.
However, don’t empty your bank account to raise funds for your business. Entrepreneurs must set aside living expenses (such as rent and groceries) so that they can last for a year. This is due to the fact that many startups do not generate profits for several months after opening.
Smaller service-oriented companies are likely to be able to do without operating expenses for three to six months, according to FreshBooks.
The SBA has some tips on how to save money to start your small business, including:
Reduce credit card debt. Call your bank to request a lower interest rate.
Set up automatic deduction to your savings account.
Get rid of any services you don’t use, such as a gym or car sharing.
Customize your budget with a service like You Need a Budget.
Buy used. This includes your car and any other purchases. Look for Facebook groups in your area about trading or selling used items.
2. Personal loans
This tactic involves borrowing money from family and friends. In order not to be offended, state the terms of your personal loan in writing. State clearly how much you need, what the interest rate is and when it will be refunded.
3. Credit cards
You can use your personal credit card or open a business credit card.
Even if this option is open to you, do not take it lightly. Credit cards often have high interest rates that increase your balance every month. You may end up with a debt balance much higher than you planned, which could harm your new business.
Still convinced that credit cards are the best way for you? Make sure you are using a card with the lowest possible interest rate and excellent repayment terms. Explore Credit.com to find the right card for your business.
4. Bank loans
Unfortunately, small business loans are not guaranteed. Banks need solid business plans and excellent credit ratings before they consider approving a small business loan.
They may also ask you to invest your own money in the business to prove that you are truly committed to making your company work.
You can contact your personal bank as they are already familiar with your banking history. Or choose a bank that is historically known for small business lending. To increase your chances of getting a loan, choose a lender with an SBA guarantee.
5. Venture capital and business angels
Venture capital and business angels are best for fast-growing companies or companies that are already profitable and have good cash flow. However, each investor has its own specialization in terms of region, industry and company age.
Either way, you need a unique idea and a solid business plan to attract their investment. The SBA can help you find potential private investors through its SBIC program. Investments are usually made within three years.
SBIC investments are of three types:
Loans. SBIC loans range from $ 250,000 to $ 10 million that must be repaid (with interest). Interest rates from 9 to 16 percent.
Capital. SBIC will give you money for your business for a fraction of ownership (and control). Investments range from $ 100,000 to $ 5 million.
Credit and capital. A combination of the first two options. Loans are provided at an interest rate of 10 to 14 percent, and investments range from $ 250,000 to $ 10 million.
6. State programs
Government grants may require some research to find what works for you. Fortunately, the SBA has offices throughout the United States that can train you on the grants available, as well as provide business advice and training. Grants.gov also contains information on over 1000 federal grant programs.
There are also small business grants available to entrepreneurs facing unique hurdles. For example:
Women’s Business Centers offer advice on local, state and private loans for women, especially those in economic or social situations.
Minority companies can check this SBA site which links them to funding.
Business from economically disadvantaged areas.