The success of a small business depends on the funding it is able to arrange from various sources, which ensure a smooth cash flow. While many small businesses may choose to get funding in the early stages to start the business, many need access to financial resources even for a running business. Finding adequate funding for small ventures is tough and time consuming, and often, entrepreneurs end up utilizing their entire savings to keep the business afloat.
Nonetheless the agencies that can be approached for funding the small business include the following:
- Self financing or Bootstrapping – A large percentage of small businesses are self financed, with the entrepreneur digging into his savings to get the project started. This is partly due to the stringent regulations of external agencies for assigning funds to small businesses. Self financing is also referred to as boot strapping, which in the world of finance, is a term used for starting a company with personal funds rather than loans. Bootstrapping, though risky for the entrepreneur, who stands to lose his entire wealth in case the business fails, also offers the advantage of complete ownership of the business without external interference or dictates from lenders.
- Banks – Banks are generally the first external agencies approached for funding. This is despite the fact that it is common knowledge in business circles that banks are very conservative in their evaluation of funding customers particularly those having small businesses. If however, they are satisfied with the business plan and are convinced about the borrower’s ability to repay and make a success of his business, they agree to the funding of the venture. Hence it is important to carry sufficient and correct information providing details that banks like to see. The experience and track record of the borrower is a major determining factor. Statistics reveal that very few new ventures get bank loans, since banks prefer to lend to running businesses.
- Private financial organizations are a little less rigid when it comes to funding small businesses. For them too, the ability to repay is of utmost importance, though their terms are tougher to meet, and interest rates higher. Many organizations demand periodic status reports of the success of the small business.
- Private lenders are often approached when an entrepreneur finds his funding request rejected by banks. Private lenders are often individuals with funds to spare and require similar details about the business as banks. They have their own enquiry channels and conduct due diligence before agreeing to the funding of a business proposal. But if they do see a sound business plan, an entrepreneur with the right qualifications, contingency plans and realistic projections, they agree to even highly risky ventures. Many private lenders offer flexible pay back plans, and prove to be a valuable business associate for the small business.
- Grants are meant for certain types of businesses. These are special programs designed to encourage a section of the community, for example, women entrepreneurs or those belonging to a minority community, in fields where a governmental push will help. Grants are also referred to as “free money” since they are interest free. However, it is extremely difficult to get grants since there are too many contenders.
- Factoring as a source of small business funds, refers to a factor or financial institution gives an advance to a company on the basis of its outstanding account receivables. This is an expensive source of funding but it helps the entrepreneur get immediate access to cash and helps him improve his cash flow.
- Venture capitalists are mainly companies with large amounts of cash kept for businesses to help them start. They fund new businesses which they feel have enormous growth potential and trust the entrepreneur’s ability. These funds come at a much higher price and the venture capitalists expect to have a role in the business decisions as well and the running of the company.