Many people dream of having their own businesses. And with the Great Resignation we’ve been seeing recently, this is a very popular trend.
However, starting your own business isn’t as simple as having a great idea and a potential customer base.
You’re going to need capital.
Assess How Much You Need
Every small business has different needs. This means that no financial solution is one-size-fits-all. Your personal financial situation and your vision for your business are responsible for shaping your venture’s financial future.
When you know how much start-up funding you’ll require, it’s time to figure out how you’ll obtain it.
You’ve got two options: investors and loans.
So, in this article, we’ll have a look at the pros and cons of both so that you can make the best decision about which option you need to go for.
Acquire Venture Capital Investments From Investors
Investors can allocate funding to begin your business in the format of venture capital investments. Venture capital is usually offered in exchange for an ownership stake in your business, or alternatively, an active role in the company.
Venture capital differs from traditional financing in a couple of important ways. Venture capital would normally:
- Focus on high-growth companies
- Invest capital in return for equity as opposed to debt (it’s not a loan, but we’ll have a look at this form of financing later)
- Take much higher risks in exchange for possible higher returns
- Have a longer investment horizon as opposed to traditional financing
Nearly all venture capitalists will, as a minimum, want a seat on the board of directors. So, you need to be prepared to give up some portion of control and ownership of your business in return for the funding that you need.
What Are The Advantages Of Venture Capital Investments?
Obtaining venture capital has a number of different advantages. For fast-growing small businesses that want to scale quickly, it could be the only viable option. Besides money, venture capital firms offer input and introductions to potential future investment partners. In addition, they may help secure future funding.
Here are some of the pros of this kind of investment.
- The money is yours to keep—no matter what. Venture capital investors are gambling on your business. If it succeeds, they win big; if it fails, they take their losses.
- Venture capital investors can assist in accelerating your businesses growth
- Venture capital investors can connect you to other business leaders who can assist you in taking your business to the next level.
What Are The Disadvantages Of Venture Capital Investments?
While the attraction of raising vast sums of money so that you can scale and grow your business is enticing, receiving venture capital ultimately means that you will be giving up some level of your control in your small business.
As well as maintaining growth, you’ll have to pass a due diligence process. In addition—as we said earlier—you’ll have someone from the venture capital firm sit on your board of directors so that they can oversee your actions.
Here are a couple of the disadvantages of venture capital investment:
- Your ownership stake in the business is reduced
- Finding venture capital investors can distract you from your business
- Venture capital funding is relatively scarce and difficult to obtain
Small Business Loans
A vast number of traditional and alternative lenders offer small business loans. These types of loans can help your small business to grow, finance new research and development, assist you with expanding into new territories, boost sales and marketing efforts, and give you the opportunity to hire much-needed employees.
There are a number of types of small business loans available. Your choices vary depending on your business requirements, the length of the loan, and the particular terms of the loan.
What Are The Pros Of A Small Business Loan?
There are many reasons that many entrepreneurs opt for small business loans to begin or grow their operations. These include:
- Small businesses can access large amounts of capital
- Lower interest rates
What Are The Cons Of A Small Business Loan?
Even though small business loans have plenty of advantages that make them enticing, they also have a couple of downsides. Here are some of them:
- Interest rates depend on your credit score
- Lenders often require collateral
- Banks prefer to lend money to established businesses
Loans From Family And Friends
If you don’t want to go for a small business loan, it’s quite common in the early stages of a small to medium enterprise (SMME) for parents, siblings, or friends to support your venture. This choice is most suitable for businesses that need initial support to get off the ground. They can then prove their concept and that they’re financially viable before approaching a lending institution or venture capitalist.
The advantage of getting funding for your small business from people you know is that it’s a quicker process that tends to have more flexible terms.
Depending on the amount of interest you pay your friends and family, this could be a great investment for them. Or they may offer an interest-free loan, which is even more advantageous to you.
However, before you decide to go for this type of loan, be warned that mixing business with family and friends’ finances has the very real possibility of damaging relationships if things go wrong. You’ll have to carefully assess the possible impact of failure prior to going forward.
Alternative Funding Options
There are many other ways of funding your small business.
If you’re currently employed, you could save a portion of your salary every month until you have enough capital to get your business off the ground.
Or you could dust off your laptop and look for additional ways to make money online.
You could also start your business as a side hustle to get it going and save your profits with the intention to expand.
Alternatively, you could look into SBA government business loans and financing options for small businesses and see if there are any that are suitable or that you’re eligible for.
There’s also the option of taking out a personal loan or using your credit card if your credit limit is high enough.
Whatever financing option you opt for you need to do your homework and ensure that your business is viable, that you’ll confidently meet all repayment requirements, and that you’re not overextending yourself. When you do this, you set yourself up for a better chance of success.
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