It has always been quite a challenge for small business owners to set up their venture and even more of a daunting task to find sufficient funding for it. In recent years due to the unfortunate recession, it has become considerably harder to obtain funding through traditional means such as bank loans. This has led small business owners to come up with alternative ways to finance their business ideas. This shift from traditional to novel means has also helped those in the business of lending money, as they have moved into newer avenues such as business cash advance.
Some of the alternative ways have been in practice for quite some time but their importance was secondary to the traditional method of taking out a bank loan. With the need for funding rising and banks being extremely scrutinizing with their loan procedures, these alternative methods have taken a stronghold in the market, especially for small business owners.
Bootstrapping refers to starting up a business with a self-financed plan that allows the business to reach self-sustaining levels before the owner looks for further cash from external sources. This seems to be the most obvious choice when searching for funds. However, the success of this method naturally depends on the amount of funds required for the starting up of the business and how much funds the small business owner has in savings. While at some point a small business owner is expected to inject some cash of his or her own into the business, starting a business solely from savings or personal cash is quite risky as any loss is a direct loss of personal cash. However, one advantage is that when looking for potential investors, it looks quite favourable as it shows them that the owner is committed to the business.
- Business Angels
These can be anyone from former co-workers, employees, business partners, friends or family who believe in the vision of the company. They can put up funds for a share of the business; their role in the company can be that of a silent partner or they can be part of the regular running of the company. This is where one should be careful. No matter how in need of cash you are, you should only choose the type of ‘Business Angel’ that suits your needs and your business model.
Depending on the sort of business and the industry it is a part of, a small business owner can sometimes get a grant from the government or a foundation supporting growth in that particular sector. Generally, minorities and women are able to receive funding for their projects from special interest groups. Other examples can include startups in the environmental, education, social development and agricultural sector. There are governmental and non-governmental organisations that provide grants up to a certain amount to those with promising ideas in relevant sectors.
- Special Small Business Loans
Similar to grants, institutions and foundations dedicated to growth in certain industry sectors or for employment growth of certain demographics can provide loans to small business owners who qualify for them. As with grants, women and minorities often have a higher chance (especially in developing countries) for obtaining these loans. Even in more developed countries, there are always special interest groups who have enough cash to help startups, but the selection process can be quite rigorous. A good business model helps in this case.
- Business Cash Advance
A method of financing new small business ventures that is becoming quite popular among small business owners is the Business Cash Advance or also known as the Merchant Cash Advance. Different companies have been set up who are providing this service to those strapped for cash but in need of funds to start their businesses or grow them further. In this, a lender provides the required funds up front to the business owner for repayment through future credit card sales of the business. Naturally, this method is most suited to businesses that rely heavily on credit card sales (or can at least make this shift without inconveniencing their customers). This type of loan does not rely on credit score history, a detailed business plan or descriptions of where the money will be spent. The repayment schedule can also be adjusted to the volume of credit card sales.
These alternative methods help small business owners set up their companies and provide them with enough cash to ensure that the business reaches self-sustaining levels. Once a business has proven to be successful in generating positive revenues over a period of time, the small business owner has more leverage when applying for a traditional bank loan. For those just starting a new business, having a good business plan and model goes a long way. It instils confidence in those willing to invest in the business and allows them to clearly understand what the small business owner aims to do. Furthermore, it can give them an idea regarding the feasibility of the company and a vague idea of how long it will take for them to be completely repaid. Any small business owner must always remain confident in his or her idea and continue seeking other forms of funding. Moreover, he or she should focus whole-heartedly on the project, especially after obtaining funding as otherwise a nascent business can face failure at an early stage and repayment becomes a nightmare.