Capital is the first requirement for any business to start. Therefore raising capital becomes the first and most important activity once the business plan is in place. This is difficult and daunting especially for startups with no previous credit records. This perhaps explains why most small business startups have owner contributions from their savings.
Building a capital base to start the business requires raising this capital from multiple sources. Some of the sources tapped for funds include:
- Friends and family-they often provide interest free loans to the entrepreneur and are not in a hurry to get their funds back
- Banks offer multiple options to borrow capital. These include term loans, lines of credit, business credit cards
- Private financial institutions are not averse to lending funds to small businesses which show promise and a sound business plan is in place.
- Venture capitalists are professionals who managed the funds pooled by many people who wish to see income generated. They generally back winning ideas for business and help build the capital base
- Angel investors are rich individuals with plenty of funds that they like to use to encourage a new business venture or help an existing one expand.
- Advertising to collect funds from the public-many people are willing to invest in a new business that has high chances of success.
- Government programs also provide financial support. The U.S. Small Business Administration provides helpful assistance and multiple funding options to help small businesses.
- Selling stock is generally not an option for small businesses but it can be considered if the entrepreneur is open to diluting his ownership. He can opt for private placement and exercise control over who wants to sell his shares to. This is a cumbersome process that requires agency approvals and meeting a list of conditions is necessary before clearances are granted
- Factoring and forfeiting help to raise some capital and are tied to the account receivables of the business. Factoring involves the sale of all the invoices or receivables while forfaiting involves the sale of just one transaction. Both sales are at a discount.
- Grants are provided by governments for special projects in a field that need an impetus and expanding them is crucial. But grants are difficult to come by since there are limited funds and too many contenders.
How SBA helps to raise capital for small businesses
The SBA or Small Business Administration is a U.S. government agency that does not directly offer funds, but helps small businesses get funds through a network of private lenders and contributes by guaranteeing the loans. This is a boon for small businesses that have failed to secure capital from other sources. Additionally, it provides expertise and advice for making the business venture successful at every step. Its loan program covers various kinds of loans that a small business can avail subject to the fulfillment of a list of conditions. These include a powerful business plan, owner’s own funds should be invested in the business, the entrepreneur should have a good personal credit rating and is professionally qualified and experienced to run the business, and can offer some assets as collateral. The SBA is one of the most important sources of small business loans in the U.S.