Funding Options for Small Businesses

Funding plays a key role in starting a business.

Funding is one of the hurdles entrepreneurs have to overcome. No matter the size of your company, you require adequate funding to start and grow your business. Though the ease at which each is able to achieve this may differ from one another. Definitely, funding could be easier for companies that are well established than small businesses which are still trying to get their footing right. For example, when an individual approaches banks to borrow money, he will be required to bring collateral, which would serve as security in case of any default. More than often, an individual is unable to provide collateral that its value will get close to the amount he wants to borrow. But for a well-established business, it has enough assets, which can be easily used as collateral. Besides, it must have established a good relationship with its banker. Bankers tend to have more confidence in well-established businesses as their cash flow from the business can be easily seen via the company’s bank statements. For startup businesses, all these are not available. It makes funding difficult to access for budding entrepreneurs. Therefore, the focus of this write up would be on small businesses.

Read Also: How to Get Loan from the Bank

Many dreams have been nipped in the bud as a result funding difficulty. You can imagine the pain and agony of having a dream and not be able to make it a reality because of funding issue. This could be painful indeed. But is getting loans from the bank the only funding opportunity? The answer is capital No! There are other ways of funding of business which some people tend to neglect and these shall be discussed here.

Personal Savings

The first funding option is through personal savings. As an entrepreneur that wants to start a business, you are expected to have some savings no matter how little it might be. Some people find it difficult to save. The truth of the matter is that if you want to succeed as an entrepreneur, savings should be part and parcel of you. If you cannot save some amount on your own as part of your initial capital, there is a tendency that even if you are able to raise funds from other sources, you might not be able to manage it.

Experts suggest that an individual should, at least, be able to contribute twenty five percent of the required capital for his business. When you have your own contribution, it becomes easier for you to look for other sources to generate additional capital. Look at it yourself, if somebody wants to start a business and approaches you to assist in funding.  If you ask him how much he has been able to provide on his own and his answer is ‘nothing’, you will not like to give such request a positive consideration. Having a personal contribution is a way of convincing people of how serious you are about your business idea. If you can’t risk your own capital, it means that you are not confident or optimistic about the success of the business.

Borrowing from friends and relations

This is another way of funding your business. If you have a good business idea and you are able to convince your friends and relatives, you will be surprised how willing they may be in helping you. If they don’t have the money personally, they can serve as links to securing funding from other sources. But before they can do this, you must be a man or woman of integrity. A person they can vouch for his character and credit worthiness. If you had borrowed money before and refused to honour the terms and conditions for the repayment, it might be difficult for you to enjoy this funding option. One of the best ways of ensuring you get adequate supports from friends and relations is that you should not ask for free funding. Suggest that you are willing to pay interest. There is every a likelihood that the funds you borrow from friends will attract a lower interest rate. It is usually a win-win approach. Your friend gets higher interest on his capital than he would have gotten if he took his money to the bank and you get lower interest than what the banks would have charged you. A lot of people don’t know about this funding strategy. When you do the analysis for them, the chances of getting funds from them is high.

There is a very important thing to note here. When you borrow funds from friends or relation to run your business, make sure the terms and conditions of the loans are agreed and documented. Some will like to receive interests while some may even be willing to offer you interest free. The problem with interest free funds is that some lenders will think that it is an equity contribution to your business. As the business grows and begins to turn in profits, they expect that you pay dividends to them. To avoid strained relationship or legal actions in the near future, it is advisable for both party to document the terms and conditions for providing such funds. 

Leasing

It is a misconception that when you want to start a business that you must have all the capital to buy all the assets needed to run the business. By the time you do the estimation of the funding requirements to start up the business, it could be so much that you are discouraged because of the inability to raise the funds. You don’t need to buy all things on cash basis. There are some leasing companies who can lease the assets you need to jump-start your business by paying a monthly or annual rental. This will ease your cash flow, as you don’t need to pay all the money you would have used to buy the asset at once. Other available monies can be used for other purposes especially as part of the working capital. You don’t need to tie down your capital on the acquisition of assets. This is one of the mistakes young entrepreneurs run into. They use all their funds in the acquisition of fixed assets with no or little left to cater for the day to day running of the business. Another benefit of this funding option is that, if peradventure, the business did not turn out to be profitable or there is a change in technology which might require you to use new machines or equipment, you are not faced with the problem of disposing the old equipment which would have been sold less than its book value as a result of obsolescence which has set in. 

Credit Purchase

Credit purchase is another way of funding your business. When you buy goods on credit from your suppliers, they are actually funding your business. If you are credit worthy, some suppliers are willing to have a credit policy with you which allow you to buy their products on credit and pay back at a specified future period. It can be a period of thirty days. When you are given this type of opportunity, ensure you keep to the terms of the credit. Don’t use Peter to pay Paul. At times, your sales can be faster in a particular month and you are tempted to quickly use the funds for other purpose. If you are not able to recoup the money on time, it will create a problem and this might strain the relationship. It is better to pay earlier than the specified time. This will boost the confidence that your suppliers have on it and they would not be afraid of extending more goods to you on credit. And if there is a period you can’t meet up with the days of credit, they will easily understand. 

Bank Overdrafts

When your business has started, it is important that you open a bank account for the business. Don’t pay the proceeds from your business into your own personal account. Learn how to separate personal matters from business activities. When your bankers see the track of your records in term of turnover, they can allow you to overdraw your account. This method of funding is popular. The bank will normally charge you interest. But I consider it worthwhile if you can borrow form the bank at an interest that is lower than the margin you record on your products. But if the interest is not favourable, there is no need getting the overdraft. If you obtain such overdraft, your turnover might actually increase but it will not lead to profitability. Analyse the costs and benefits before you go into this funding method. There might be exception to this. A situation might warrant that you borrow fund to meet a pressing need, which can jeopardize your business if not met immediately. But it is advisable that you plan your cash flow so that you will not find yourself in this type of situation.

Read Also: Vital Sources of Finance for Small Businesses

 Venture Capital

There are many successful entrepreneurs who have idle funds and are willing to help the upcoming ones by funding their businesses. You can approach this type of individuals to raise funds. But remember that these are individuals with a lot of business experience. They don’t just throw their money into any business. They want to see your detailed business plan. They analyse it to determine the feasibility of the proposed business. So, when you want to approach them for funds, arm yourself with all information on your business so that you will not be turned down. If your business proposition is worthwhile, they usually require equity participation. One good thing about this is that they have experiences, which you can tap into in running your business.

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9 thoughts on “Funding Options for Small Businesses

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