Funding for Small Business Ideas
Many entrepreneurs use external financing when starting a new business venture. Financing is often needed because entrepreneurs do not have the capital resources for starting a small business. Entrepreneurs may be required to present a business plan to banks, lenders or investors to secure their startup capital. A business plan often outlines the money needed for starting the business, expected monthly expenses, economic analysis to determine the new ventures long-term viability and other financial-related information.
Traditional bank loans are a common funding source for small business ventures. Banks and lenders usually offer entrepreneurs special small business loans that may or may not be guaranteed by the Small Business Administration (SBA). The SBA provides financial guarantees to banks and lenders’ offering small business loan programs to ensure credit is available for starting businesses. These guarantees pay off bank loans in case of default by the small business; the entrepreneur is then required to repay the SBA.
Bank loans carry several disadvantages for small business owners. Loan terms may include high interest rates, short loan periods in fixed monthly repayments or large periodic balloon payments. Fixed repayments or high balloon requirements may create significant negative cash outflows during the fragile early years of new business ventures.
Entrepreneurs may look for equity investments when financing their business idea. Equity investments often include venture capitalists or investment agreements with private investment firms or individual investors. Venture capitalists look for new business opportunities that can repay them significant interest on invested capital. These investors are willing to put up copious amounts of capital if they believe the small business venture has a high probability of success. In addition to high interest rate returns, venture capitalists may require collateral or decision-making power in the new business venture.
Private investments may be secured by entrepreneurs from companies currently operating in the business environment or create partnerships with individuals investors. These agreements often allow entrepreneurs to negotiate investment terms and provide favorable repayment terms for invested capital.
Alternative funding sources may exist for new small business ventures. These sources may include investments from family or friends, taking a loan against personal retirement accounts or slowly growing the business through operational profits. Securing the loan from family or friends often allows entrepreneurs to repay the loan as the business grows with little to no interest involved. Loans against retirement accounts usually require entrepreneurs to present their retirement funds as collateral for a loan. This may be extremely risky if the small business fails; in addition to the business being wiped out, entrepreneurs may lose their retirement funds to pay for business debt.
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