Most people starting up a small business initially finance themselves, or with help from other family members. However, this is usually not enough to keep it growing and it is not long before you start looking around for more capital to finance that growth. This is where it gets hard because banks often look at small business as a particularly bad risk, usually because of the entrepreneurs being inexperienced, and if you have any success at all with a bank, you will undoubtedly need to mortgage your home or use it and anything else you have available as security, to satisfy the bank’s stringent requirements.
Probably the best way out of this predicament is to have a team around you that is sufficiently wealthy in its own right to help you out, but this is not always possible as no one does anything out of love any more. This means that any money given to help you expand will one day need repaying and this could force an early resale of the business if sufficient cash flow is not immediately available at that time.
Venture capitalists, angel investors, and other professional investors are people willing to risk their entire investment but because of this risk, they will only invest in your venture if it shows promise of growing its market in the area of $5 million to $10 million. And then they will most likely replace you as the CEO with one of their own.
There are ways, however, where small business can access start up financing that are more realistic, where you carry less risk of losing everything you are building:
- Factoring. All small businesses carry a large number of debtors and with factoring you can turn these debtors into cash that will allow you to finance your further growth. The factoring company simply buys your debtor list off you for a certain price.
- American Cash Flow Corporation. This organisation focuses on sales and cash flows. In other words they show you how to convert your expected cash flow over a period of time into a lump sum payment today. There are quite a few business enterprise programs available to help small business. They will point you towards what government grants and business loans are available to best suit your particular business. The appropriate authorities to contact are; the Association for Enterprise Opportunity and the Corporation for Enterprise Development.
- The U.S. Department of Housing and Urban Development can sometimes help small businesses who qualify for sub-contracting to a larger firm working in various communities. This assistance is usually in the form of construction costs and equipment loans through the Community Development Block Grant Program.
- The Community Business Daily. A publication that lists the available government contracts, many of which offer sub-contracting work to small businesses.
- Small Business Administration (SBA). This body includes the 7(a) loan guarantee plan. It can give small business a guarantee of up to 75 percent on a loan from a commercial lender or a bank, up to a maximum of $75,000.
- Twitter. Social media can connect you to friends, family, colleagues and job opportunities and some entrepreneurs, have been successful in attracting investors with 140 characters or less posted on Twitter. One successful small business was Naked Pizza, a restaurant chain that started using the social media as part of their business operations five years ago.
- 40Billion http://www.40billion.com/. This is a website aimed at giving assistance to small business looking for start up funding. 40Billion connects people with Facebook and LinkedIn investors through their extended social family connections.
- PeerBackers http://peerbackers.com/. Yet another website that focuses on crowd funding. It invites anyone with an idea, invention, business, or project, to come on board where it then coordinates the assistance offered by various funders.
- IndieGoGo http://www.indiegogo.com/. A world wide funding market that brings investors and projects together. Much of its work is based around projects with a social benefit, however, small businesses with a profit motivation is accommodated especially if you can offer a taxation deduction for the potential investor.
- Cofundit http://www.cofundit.com/home. A European site, but good ideas and money is a worldwide partnership these days. Conundit caters for the higher end of the start up market with people wanting amounts from $200,000 upwards.
Start up funding for small business will always be hard to obtain simply because the future of the business is an unknown factor. This is why you must put together a sound and realistic business plan that contains certain goals, or benchmarks, that can be attained. As well as having a workable business plan you must ensure you have a management team that is capable of working within the business plan.
It is preferable if you can have key personnel managing strategic parts of your business, if you can’t afford this calibre of person while you are starting up, it is advisable to have such people working for you on a part time basis, even if it is only in an advisory role. This is important to a potential investor, as he or she will want to know that your business has the proper management, to enable it to prosper with the new injection of funding you are seeking.