One of the challenges a new small business faces is financing or finances. Where to get the money to start this new small business. This is surely the biggest hurdle for all businesses, and the one that prevents many businesses from even getting off the ground.
In general, small finance has a few routes when it comes to financing and funding.
Bank loans tend to be quite an onerous route. Banks require all kinds of guarantees, as well as a formal and very detailed business plan. Banks often make it difficult to get you a loan and today, with the credit crunch and tough economic times, even more so. They may require collateral such as the business owner’s assets, such as perhaps his home, if he owns it. Banks may also have stipulations and conditions in the loan agreement that may be difficult to meet. For example, banks may require you to rent the space you want to use for your business, instead of buying the space. The reason is that they do not want you to tie up your money in assets that do not offer returns in the short term. They may stipulate that you use the money for inventory, which has almost immediate value in the form of resale property, instead of buying the building. Naturally, bank loans come with interest charges. Very often these loans come with multiple conditions. The amount of financing and the type of business, as well as the personal financial record of the business owner, are keys to receiving any type of loan.
Government grants are another route. The US, Canada, and many European countries have government departments, state corporations, or government-sponsored programs that specialize in grants and assistance, and some even provide small business loans. Local and state governments often do the same.
Friends and family are also another avenue for getting start-up funds. These are often a good source because they know you and trust and believe in you. The downside is that they may believe that since they loaned you the funds, they have a say in the running of your new small business. The advantage is that interest charges, if any, can be easily negotiated as opposed to dealing with a financial institution like a bank.
Dipping into your personal savings is another way to finance your business. This should be the most common way to finance your business, although it is typically used in combination with any of the other methods. The big advantage is that there are no interest charges like other loans and there are no expectations from family or friends.
The last source I will cover is from private investors, venture capitalists, or partners. If you have a great new business idea and can sell it to them, they can be a great source of funding. Naturally, the business idea will really have to be well thought out and the profit projections really good for them to take the plunge. The number of small startups in the US in the high-tech and computing sectors that became huge successes is legendary. Google is one such example. The downside of this method is that the idea has to be unique and viable, and of course, this type of financing usually comes at a high price. No interest charges, but often a majority ownership interest in the company.