You hear so much about small businesses and startups getting venture capital, small business loans and other types of financing on one hand, but on the other hand, you hear about how hard it is to get it. Is it worth the hassle to try to get funds to grow your business, or should you just bootstrap when starting a business?
Let’s first look at the different small business financing options you have.
1. Small Business Loan
The Small Business Administration backs loans for small businesses provided through banks. There are different types of SBA loans, and some are harder than others to get. (But if, for example, you’re in a rural area and want to start a business where there is economic incentive for doing so, you might find the loan process a bit easier with the SBA’s Rural Business Loan program)
2. Venture Capital
Venture capital tends to be geared toward startups that are skyrocketing in growth. Venture capital firms look for very specific traits in the companies they fund, such as scalability and tech industry opportunity. But there are 100 times as many startups looking for funding than their are VCs looking to invest, so this is a difficult club to get into.
3. Angel Investors
Similar to VCs, angels look for startups that will quickly help them recoup their investments. Angel investors tend to give smaller amounts of funding, under the $500,000 mark, and require a higher return on their investment.
The hottest new thing to hit small business financing is crowdfunding. Regular people (not accredited investors) can invest money (anywhere from $5 on up) in a business seeking financing. Different programs work differently: some require the company to return the investment with interest, while others simply ask the company to give some sort of perk to investors as a thank you, like a t-shirt or product.
Weighing Your Options
Now that you know the different financing options you have, consider these factors:
- The level of difficulty of securing the money (how’s your credit? how many other startups are you vying against?)
- What you’ll have to pay back (what are interest rates for small biz loans? what does the VC require in equity?)
- How much of your company you’re willing to give up (investors take a percentage of it)
You may find that bootstrapping is a better option. This could come from dipping into your savings, taking out a second mortgage on your home or even continuing to work a full-time job while you start your business. It’s definitely the slower route, and can put a serious strain on family finances. Only you know the best path for investing in your company.