It’s that time of week again, when the joy of starting a small business is grabbed, wrung out, and strewn on my blog for all to see. Yes, it’s Small Business 101. This week, we’re going to be looking at one of the most important factors for any small business owner to consider: getting the money to grow your business.
Q: Why do I need to look at outside funding, anyway?
A: Unless you’re independently wealthy (in which case you probably are starting your small business more as a hobby than a source of income, anyway), you will likely reach the point where your successful business has grown as much as it can using only the resources you have available, that is, your personal wealth and the business’s own income. While bootstrapping can be an excellent way to get your business started without getting into debt, sometimes you need outside money in order to expand.
Q: Alright, how do I get this outside money?
A: Just as you have numerous ways of getting extra money in your personal life (borrowing from friends, taking a bank loan, doing a cash advance on your credit cards *this last one is NOT recommended, by the way*), there are several methods that can be used to pick up some extra cash to grow your business. Loans, grants and venture capital are all ways to build up your capital reserves and allow your business to grow.
Q: Well, let’s take it one step at a time; what sort of loans are available?
A: Well, there are a variety of different loans available. Basically, anyone willing to give you money in exchange for the promise that you pay it back (possibly with interest) could be a source of funding. Your parents, your friends, your immediate family; if they will give you money, they could be a source of funding. With personal loans like these, how much you want to do in terms of setting up official terms and writing out a contract will depend on you and the person from whom you are borrowing; although, having a paper trail, preferably one verified by an outside source, will make matters easier if you wind up in court at some point in the future.
If you want to go for a more ‘official’ route, or simply don’t know anyone willing and able to loan you the amount you need, there are any number of sources for loans from banks to get your company moving in the right direction. If you’re an American, it’ll be worthwhile to look for Small Business Administration (SBA) Loans. While the SBA doesn’t make loans directly, they do provide assurances to lender that a portion of your loan will be repaid, even if you end up defaulting. As a result, you will usually get much better terms (lower interest rates, longer repayment terms, higher loan amounts) than would be possible without SBA backing. To learn about SBA loans (and the qualifications you need in order to be eligible) check here for more details.
Q: Alright, so it’s not too hard to get a loan; what if I want a grant, instead?
A: Well, good news and bad news in this respect. The good news is, if you have an exceptionally generous family, you might be able to wrangle funds from them without the need to pay it back. The bad news is, if you don’t have a generous family, or lack a few well off family members to provide the grant, you’re probably out of luck. The federal government most emphatically does NOT give out grants to businesses, and private businesses tend to balk at that sort of arrangement, as well. (They say something about wanting to make a profit themselves). There is a small glimmer of hope, in that some states or local governments might be willing to grant you money to help you produce jobs in their area, so it might be worth approaching officials in areas to which you’d like to relocate. But even then, don’t get your hopes up.
Q: Fiddlesticks. How about venture capital? Where can I get some of that?
A: Well, if your company shows promise and high potential future profits, you can approach venture capital investment companies about the possibility of getting funding to grow your company. The requirements tend to be steep, however: venture capitalists are out to make a profit, after all, and in return for their funding, you will typically have to agree to provide them with a good amount of equity (that is, ownership of your company) when you go public. You’ll also generally have allow them oversight of your company as they help you to grow and bring it public.
If you are still interested in venture capital as a means of funding your small business, you can check out the government’s Small Business Investment Companies Program (SBIC), which helps match small business owners with venture capitalists. (Never let it be said that the government doesn’t try to help small business.) You can learn more about the program, find out what you need to do to get funding, and even search for venture capital firms based on your location, size, and field of work.
That should help you to get more money than you could ever possibly need to grow your business into a globe crushing behemoth (I’m looking at you, Microsoft.) Just remember, there is money out there if you know where to look. Good luck in growing your business!
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Aaron Wakling
on December 15 2009
I’ve been reading along for a while now. I just wanted to drop you a comment to say keep up the good work.
Roger
on December 16 2009
Thanks, Aaron; it’s always nice to know there are people out there who read and appreciate what I write (besides Financial Samurai, of course) I’ll do my best to keep writing even more interesting posts.
Hunter Reed
on July 5 2010
me and my friends have been into venture capital investments and so far the income is great.:`-