5 Sources of Finance for Small Businesses You Should Know

Introduction

Arranging finance for a new business is extremely crucial. It is not a wise strategy to pour all money into the start-up costs. The finance sources should be diverse in order to meet all the financial needs.

Moreover, it casts a good impression on the lenders. Each finance source comes with its own benefits and consequences.

Below is the overview of some sources for a business start-up.

Sources of Finances:

1) Business incubators

This source concentrates on the high-tech sector and it is also known as business accelerators. Business incubators support new businesses throughout the steps of development.

Apart from the high-tech field, the local economic development incubators are also available which support revitalization, hosting, job creation, and other such aspects.

Incubators share logistical, administrative and technical resources to fledgling companies and businesses from the future. Moreover, the premises are shared as well for example laboratories in order to test the products at a cost effective margin.

Normally, this incubation procedure can go for 2 years and after a product is prepared, the business is departed from the premises of the incubator. Afterward, the phase of industrial production gets initiated which is independent of any resources.

The new businesses which receive this type of help usually work within the sectors of information technology, industrial technology, biotechnology and multimedia.

2) Bank loans

This is undoubtedly the most popular and used finance source for the funding of both small and medium-sized businesses.

Bank loans are different in nature depending on each bank and each bank has its own perks. The advantages of bank loans can include customized repayment or personalized service.

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Therefore, one should do research, visit several banks and pick the one which suits the preferences and financial needs. Usually, banks prefer giving loans to those businesses which have a clean track record along with a good reputation.

No business idea can be successful without an effective plan. For the start-up costs, a bank generally asks for a personal guarantee from the fresh entrepreneurs before giving the loan.

3) Venture Capital

This financial source is not appropriate for all entrepreneurs because the venture capitalists search for businesses that are involved in technology and have great potential in terms of growth. The venture capital focuses on the fields of Communications, biotechnology, and information technology.

They offer big investments of $1,00,000. Mostly they offer a high risk project because they claim an equal position in the business.

Therefore, the entrepreneur has to give up some percentage of equity and ownership from the company to the external party of venture capital. This source also demands a handsome sum in return to the investment. This demand is met when the company starts to sell shares.

Therefore, the entrepreneur should be mindful of engaging with investors who have a good knowledge and expertise relatable to your particular business.

4) Angels

This specific financial source consists of low-profile rich people who are mostly retired executives. These executives usually invest in small business firms of others. Being professional leaders in their related field, they share their list of contacts and expertise.

Moreover, the knowledge regarding management and technical aspects is also provided by them. Angels support the financial needs of the start-up costs.

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The order of their investment ranges from $25,000 to $100,000. Angels demand the right to monitor the management practices of the business. In more accurate words, this means that they get a seat in the board of directors along with the confidence of transparency. Since they have a low-profile, it is not easy to meet them.

To do this, one has to talk to specialized associations or look out for websites of angels. For example, an umbrella organization exists by the name of National Angel Capital Organization (NACO). This organization stores capacity for the angel investors in Canada.

At this organization, one can check the directory of members who will further give ideas on where to get an Angel investor. They will provide an investor in your nearby location.

5) Love Money

This is a loan given by parents, a spouse, friends, or family. In the terms of banners and investors, it is called patient capital. In concrete definition, it is the money that is loaned and returned afterward as the business starts earning

profits. Before borrowing from this source, remember that your contacts might ask for equity in the company and they usually do not have much capital.

Conclusion

Employing a few of these financial sources can make you a proactive entrepreneur. Moreover, it is a healthy business strategy to finance a business, especially at the start by taking from different sources.

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