Types Of Financing
Financing sources for starting and running a business
Starting a business can be one of the most challenging endeavors one can pursue. Up to fifty percent of start-up businesses fail within the first five years of operation and up to eighty percent will fail within ten years. There are many reasons why businesses fail, and one of the main reasons has to do with the lack of funding. The lack of funding is also one of the main reasons why businesses fail to launch. Getting financing to start and run a business can be challenging, but there are many sources an entrepreneur can access to get the financing they need.
Getting financing for a start-up business can be difficult for an entrepreneur because they may not have a track record of sales or revenue to justify a loan, investment or especially unsecured loans. An increasingly popular source of start-up financing is through the use of crowdfunding from sites such as Kickstarter.com. An entrepreneur can post their business and financing need on Kickstarter and offer a free sample product or service in return for pledges. Pledges are not loans or investments so there is nothing for the entrepreneur to pay back, and they do not have to give up equity in their business.
An entrepreneur may have to rely on their own resources to finance their start-up business. Many times an entrepreneur will have a steady “day job” that provides them with a reliable stream of income that they can save and use to finance their business. They may also use credit cards, get a home equity loan if they own a home or they can ask family and friends for a loan. Asking family and friends for a loan can be a sensitive issue but the entrepreneur can offer paying them back with interest or give them an equity stake in the business to make it a better deal for them.
Financing for growth
Traditional financing sources like bank loans can be very difficult for start-up businesses to get because they do not have the sales or revenue track record that banks like to see. Typically banks are more open to lending to businesses that have been open anywhere from 6 to 24 months minimum because they like to secure the loan using the company’s accounts receivables, equipment and/or real estate. The Small Business Administration also provides loans. Their requirements for a loan are similar to banks, but the problem is that SBA funds tend to run out. An entrepreneur should check to see if the SBA is lending before completing an application. It can take several weeks to several months for an entrepreneur to receive a check for an approved loan from a bank or the SBA so an alternative would be to go to an online lender. Online lenders like On Deck, Lending Club, and Kabbage have the same lending requirements as banks and the SBA but an entrepreneur may have a check in their hands in as little as a few days instead of weeks or months.