The first hurdle that wannabe entrepreneurs usually need to deal with is the matter of funding their business. Since most are unlikely to have rich dads or kindly uncles to provide the necessary financial propulsion, budding entrepreneurs need to take a very hard look at the various options available and then chart out their actions accordingly.
A study conducted by the National Federation of Independent Business in 2012 reveals that as many as 79% of owners of small businesses took recourse to their credit cards to capitalize their businesses. Another study of business credit card use between 2003 and 2008 showed that using credit cards for starting or expanding a business has a remarkable positive impact on both the business and the overall economy. For every $1,000 of business credit card use, revenues increased by more than five times to $5,500 and in the process created jobs in excess of 1.6 million. Unfortunately, since most credit card issuers insist on a good credit score, budding entrepreneurs with poor scores will need to examine alternative funding. However, since credit cards only account for a quarter of business funding, a substantial amount of funding can be accessed from other sources that necessarily do not give much importance to credit scores.
Family, Friends and Relatives
Studies reveal that entrepreneurs turn to immediate family, relative and friends to fund their dreams and apparently the idea goes down well with them as more than half of small business owners surveyed revealed that they had received funding from them. It is easy to see why this mode of funding is prevalent as there is no requirement of credit scores, documentation, and collateral. Most of the people approached are only too happy to be able to participate in the entrepreneurial dream. Of course, individual funding amounts can be somewhat low when compared to banks and financial institutions. Immediate family members may even be willing to take a line of credit using the home as collateral, however this mode of funding should be used extremely judiciously as this means that the home will be at risk if the venture falls flat. If you have managed to sell your dream to your family and relatives, you should not take them for granted but treat them just the same as if they were your seed capitalists. You should make a conscious effort to keep them posted about the status of your business and its finances. Celebrate with them but also keep them posted about any impending dark clouds on the horizon.
Microloans, as the name suggests are typically small loans extended by non-banking institutions to those who do not normally qualify for conventional bank loans. Usually the quantum of funds made available ranges from $5,000 to a maximum of $50,000. There are a number of providers of microloans that can be discovered on the Internet that can be excellent sources of funds. When you make timely payments to these sources, these are reported and lead to the improvement of your credit score. It is a good idea to do a thorough comparison between lenders as the amounts of funds provided and interest rates, besides other terms and conditions can vary widely. Microloans can be very good option for startups and small businesses that have a relatively low requirement of capital and also an extremely limited history of operations. Entrepreneurs can also expect to receive a certain level of financial advice with regard to small business operation that may prove useful.
Crowdfunding and Peer-To-Peer Loans
Easy access to the Internet and the proliferation of social media platforms has led to the birth of crowdfunding wherein a business venture concept and financial requirement is announced online and a large number of people who may be enthused by the concept donate the money to fund the business. The typical funding routes are donations by people who believe that the project is genuinely good for society or a cause. The rewards for the investors are usually in the form of gifts and acknowledgements. Other ways of crowdfunding are by way of debt, where the principal is repaid along with a certain rate of interest or by way of equity that works just like as if the fund provider had bought a share in the business.
Author bio: Melanie Smith is a financial correspondent for an online portal that tracks emerging trends in entrepreneurial finance. She is the author of a widely-acclaimed series of articles for small business owners on how to get out of debt.