Got Money?: Funding Options for Small Businesses

Small businesses have become America’s ventilator, pumping life into the economy by generating 64% of net new jobs over the past 15 years, according to the U.S. Small Business Administration. As a result, it seems like the whole nation is chanting, “Long live the small business,” showing their faith by generously funding entrepreneurs. Here, we’ve provided a list of 5 funding options and business solutions that could help your company get off the ground:

1. Venture Capital

Venture capital (or VC) is capital provided by a firm in exchange for equity, or an ownership share, in a company. According to data from research firm CB Insights, “Venture capital investments rose 19 percent, to $21.8 billion in 2010 — the first annual increase since the downturn.” And it looks like this kind of growth will continue. Rep. Renee Elmers projects that, “Venture capital participation will increase by nearly 45%” in the next year”.

With venture capital strengthening, it is quickly becoming one of the most efficient ways to get large sums of money, anywhere from $500,000 to $1 million. Usually these firms require a structured business plan, a formal presentation and a long process to get funding.

Disadvantage: Less control over your company

2. Angel Investing

“The beginning of 2010 to now, access to capital has really blossomed and a fundamental shift in angel investing has fully taken hold,” according to founder and CEO of UBER, Travis Kalanick.

Angel investing is much less structured than venture and is oftentimes sought after in the earlier stages of company development. Angels are typically individuals who provide capital in exchange for convertible debt or equity (like VCs). Angel investing, like venture capital, has experienced a recent increase: the number of angel investors has surged 22 percent in the last year, according to the
National Venture Capital association.

Disadvantage: Some angels require a percentage stake in your company, which can be costly, and you, again, will have to give up full control.

3. Debt Financing

Debt financing includes soliciting a bank for loans with a repayment schedule at a fixed interest rate. Banks often consider previous history with other financial institutions and entrepreneurial experience when dictating whether or not to issue a loan. The upside to debt financing is that you don’t have to give up equity and you can thereby stay in full control of your business. You may have to
provide collateral for the debt.

Disadvantage: Repayment, high rates, impacts on your credit rating

4. Grants

While many people think it is highly unlikely that they will receive a grant, it is always worth a shot. This funding option will, like VCs, require a rigid and organized business plan. Usually these grants can be found at the state level, but government operations such as the Small Business Innovation Research (SBIR) also provide grants. It can’t hurt to research these “free money” options.

Disadvantage: Hard to find, apply for, and acquire

5. Friends or Family

It may be a good idea, in the first couple of years of your business, to approach the people you trust most, like your friends and family, for funding before apply for venture capital or asking an angel. If you don’t need a ton of cash, friends and family could be willing to help you out. It’s always a good idea to write an informal contract for these exchanges so you can avoid conflict.

Disadvantage: Potential conflict

There are plenty of ways to acquire cash in the difficult beginning stages of company development. The important part is finding which one is right for you.

James Kim is a writer for ChooseWhat is a company that provides product reviews and test data for business services and products. Their goal is to help small companies make informed buying decisions on business solutions that help their business.

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