You need to spend money to make money, so if you don’t have any money to spend, you need to get some, first. Finding funding is a crucial first step for most entrepreneurs, but often it is necessary to acquire additional funding throughout a small business’s life. Therefore, understanding how to determine your funding needs and knowing where to look for funding are vital business lessons for new entrepreneurs.
The type of funding you acquire to start and run your business matters – but there are plenty of blogs outlining your financing options. Instead, this guide will help you determine which funding providers are trustworthy and appropriate for your business.
Small-business loans are the bread and butter of business financing, providing an overwhelming amount of funding to thousands of small businesses every year. There are several types of small-business loans, as well as several places to obtain them, including your local bank or credit union, the Small Business Administration, and various online lenders.
The terms and rates you want will dictate where you obtain your loan – and that is generally enough. Few lenders are especially unscrupulous because federal regulations and rampant competition keep the loan process relatively straightforward. Still, you should avoid lenders that try to sell you different loans than you want. Additionally, you should be careful online, where cybercriminals create crafty websites designed to trick you into entering private information. Instead, you should do research on lenders’ reputations, using review sites like LendingTree or trustworthy organizations like the SBA.
Investors and VCs
Not all small businesses can attract the attention of venture capitalists or angel investors, but those that do stand to earn millions in startup funding. However, if you take an investor’s money, they will want a piece of your company – and with that power they can easily alter the business plan and dramatically change the future of your business. Therefore, it is paramount that you partner with like-minded investors, if you choose this funding route.
Potential investors should have proven, extensive knowledge of your business’s industry; they fit into your imagined workplace culture; and they should be able to introduce you to powerful business allies. Perhaps most important of all, investors should have strong integrity, which isn’t difficult to discern after a few meetings. A good rule of thumb is: If you wouldn’t hire a VC or investor to work at your company, you shouldn’t accept money from them.
Funding doesn’t just happen at the founding of a business. Typically, you will need to find more capital several times during your business’s lifetime. For seasonal businesses or those suffering from cash-flow troubles, invoice factoring is a low-hassle way to move money from your accounts receivable to your hands, where you can reinvest it to help your business grow. However, it is important to choose your factoring company wisely.
Factoring has existed for centuries, but there is surprisingly little regulation on the industry. As a result, some factoring companies can be less than honest, and use contracts and hidden fees to keep more of your invoice than they should. The best factoring companies will be forthright with their fee structure as well as their terms and conditions, so you won’t have any surprise expenses. A factor that exhibits poor communication or seems to withhold information should be avoided at all costs.
Bootstrapping is both the riskiest and the least risky of all funding methods. On one hand, you are putting your savings and personal assets in jeopardy; on the other hand, you are not relinquishing any authority or profits, so your business is wholly yours. Still, unless you have millions of dollars sitting in your accounts, you will probably need to seek some help with your bootstrapping endeavor.
Friends and family might be eager to support your business ideas, but you should be careful from whom you accept money. Financial obligations place strains on relationships, so you should only accept funding from those loved ones who are unlikely to break ties if your business fails. Even better, loved ones who have some business experience might be willing to supplement their cash with invaluable advice. No matter who offers you cash, you should make it clear how and when you will repay them for their contribution to your dreams.