One of the first and most consistent ongoing concerns of a small business is access to capital. Even the best of ideas can be derailed if you do not have the right amount of money to cover all the costs associated with operating that specific type of business. One of the first things that a business needs to do in planning for their startup is to evaluate what their options are for capital. There are three main options for business funding with their benefits and detriments. Each will be outlined below with a list of helpful links at the end of the document. Nothing linked in this article is endorsed by the author of this blog.
One of the first avenues that most start up companies explore is traditional lending. This is generally in the form of a business loan or line of credit established with a bank or other lending institution. For a start up, these loans are generally tied to the owner's credit and debt/income ratio. As such, the current economic situation has made it difficult for small businesses to gain access to capital.
In order to allow small businesses easier access to lending, the Small Business Administration has established several government-backed lending programs. These loans are still provided by traditional lenders, but are backed by the SBA making these lenders more likely to approve the loan. The SBA website listed below has information on all their loan packages.
There are many capital investment firms or "angel" investors that are willing to front significant capital to a new venture in exchange for ownership in the enterprise. The main thing that a capital investor is looking for when they are considering where to invest is their return on investment. That means that many times a capital investor will come in seeking significant control or division of profits in a venture that they are investing in. Depending on the amount of money a venture needs, it is important to evaluate what you are willing to sacrifice in order to get the capital that you need. You would be wise to read about different venture capitalists in order to see what industries they have worked in, past success rates, and similar metrics. If you have a great idea, you may be able to get capital, but you will have to give up a lot of control or profits in the process.
Peer to Peer Lending
Companies like Prosper.com and Lendingclub.com have set up sites that allow people to lend money to other people. The benefit to using these types of lending sites is that it allows individuals to receive smaller loans from other people that would like to invest in different ways. The sites themselves manage the loans and have fees associated with management. On Prosper, prospective lenders are able to bid a portion of the requested amount and the interest rate until a package of several lenders totals the full amount requested. These sites are tied to an individual's personal credit and can present some difficulties for individuals to get money in different situations.
Helpful Links and Information Sources
Bank of America Small Business Online Community