Understanding the Basics of Small Business Funding

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Starting and running a business costs money and this is more so important especially for small businesses. Without capital and funding, they cannot grow. The survival of the enterprise may rely on just getting funding that will help them to scale up or buy a piece of needed equipment. Sometimes, funding may be needed to overcome a challenge or bring in more hands.

The challenge is that sometimes it can be hard for small businesses to get funding or loans from traditional lending institutions. The good news on the other hand is that there are other institutions available to help small businesses pull through challenging times by loaning them the funds that they need.

Small business funding can also be referred to as small business financing or startup financing. It is a way in which a small business owner gets money to finance their present or future activities.

Definition of Small Businesses

These are mostly privately owned entities, sole proprietorships, or partnerships that have a couple of employees and often times have less revenue than average-sized corporations. Small businesses in general usually have less than 500 employees. Although this definition is limiting and may not fully capture what a small business is but typically, they make revenues of between $1 and $1,000,000 annually. They may also be classified as such based on their assets, sales, or net profits.

These businesses function at a small scale level and require less capital, less labor and fewer facilities. Usually, they produce goods or provide services and play a very vital role in the economic growth of any society or nation. Examples of these kinds of businesses can include bakeries and confectionaries, convenience stores, tradespeople, hairdressers, restaurants and guest houses, photographers, etc. You can check the article here to read further on this.

How to Get Funding or your Small Business

There are several ways in which small businesses can get funding with each one having its benefits as well as its limitations. These sources can include government funding, traditional institutions, or alternative funding sources which can be private lenders, investors, crowdfunding or even family and friends. 

The process of searching for finance is dependent on what the company needs. While a startup may look to an angel investor or venture capitalist, an average bank will not likely finance the enterprise. Already established businesses may be able to get loans to some extent from banks but this is not always the case. Also, these enterprises may be able to get approval from the Small Business Administration (SBA) in the United States. Although the SBA does not give out loans, they can guarantee them so that commercial banks can give them out. This can also have its drawback and you may not get your request approved.

In such situations as this, it may be time to look to private sources of funding. The fact that you lack a proper credit history or collateral does not mean that you will not get someone to finance you. You can get a small business micro loan from private and alternative sources. These kinds of loans although with slightly higher rates of interest are readily available to startups or established businesses who require financial help. Examples of some of these kinds of loans include:

  • Lines of credit
  • Term loans or micro loans
  • Peer to peer (P2P)
  • Investor loans.

Benefits of Private Funding

For small businesses who for one reason or the other may not qualify for a bank or government loan, their best bet may be getting funding from private sources. Private financing helps small business owners to grow. Below are a few benefits of this kind of funding.

1. Faster Access to Funds

This is one good reason to seek alternative sources of financing your business. Unlike traditional lenders, private lenders typically get approval in a shorter period. This is because they can reach decisions fasters as there are fewer levels of approval that the loan request has to go through. With this, you can turn your focus to growing your enterprise rather than waiting for several weeks or months before getting approval.

2. Ease of Approval

Asides from a quick approval, private funding can also be easier to approve. Banks and other traditional lenders will often have a long list of items to scrutinize. If your business fails any of the tests, you are likely not going to get the loan. Part of this includes checking your cash flow and credit history, asking for collateral, etc. They may also check for perceived risk and if the loan amount is too small, they may not be interested in approving your loan request. You can find a list of what banks typically check before a loan can be approved here https://smallbusiness.chron.com/things-bank-consider-before-lending-money-business-57341.html

It is not that alternative sources of financing do not check these things. They do but prefer to focus more on the health of your business and its potential revenue. With a great business plan, a good expense sheet and convincing financial projection, you should be able to get your funding easily approved.

3. Guidance

Another benefit to this source of funding is that the borrower can receive guidance from the lender. A bank will not likely provide you any assistance after giving you a loan but private lenders can offer you guidance and advice that will aid the success of your business.

Conclusion

Small businesses to a large extent are important entities to the economy of a country with thousands or may be millions of them available. No matter the stage of your company whether as a startup or an already established entity, it needs money to survive and grow.

Sometimes, there are periods when you need to scale up, buy new equipment, hire more staff, or cover an immediate cost. If you cannot get funding from traditional banks or the government at this time, do not despair as other alternative sources are readily available to help fund your business.

Be careful to carry out due diligence when borrowing, read the fine prints and understand the interest rates and what is expected of you.

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