Dinn, Hochman & Potter, LLC

Six ways to raise capital for your small business

Starting your own business is often a dream come true. You get to make the big decisions, be your own boss and build something from nothing. However, opening a business is also a lot of work.

You create your product line, market your products and select a location. Even if you are only operating online, you still need money to get started. Here are six ways you can raise money for your business.

Self-funding

Many entrepreneurs self-finance their businesses. You could take money from your savings account or cash from a retirement fund. If you own a home, you could take out a home equity loan, assuming you have equity in your home. You could also put business expenses on credit cards.

The downside of self-funding is you could lose this money if your company does not do well. Your savings or retirement money might disappear, or you may not have enough cash to pay off a loan or a credit card.

If you do decide to use credit cards, look for cards with low introductory interest rates. A person with great credit may even qualify for a 0 percent interest card. Some cards are also specifically geared toward businesses and offer cash back or rewards on business purchases.

Friends and family

Your friends and family are more likely to lend you money than a bank. They also may not charge you any interest on a loan. It is even possible some of your family may just want to invest but expect nothing in return.

Before you accept any loans from friends or family, be explicit about the terms. Find out if they want to set up a repayment schedule or charge you interest. For businesses, it may be wise to put these terms into a contract. This will ensure there are no misunderstandings. Since you love your friends and family, you certainly want to avoid any problems that could damage your relationship.

Crowdfunding

Crowdfunding is an increasingly popular choice for startups. With a crowdfunding campaign, you can offer investors rewards for investing in your business, like being the first to receive your product. You can also offer investors a piece of equity in your business, which means they will own a part of your business.

However, if your campaign is not fully funded, you do not receive any money for your business. On the other hand, if you do well, other investors will see the market is there and may be tempted to invest in your company.

Small business loan

You can pursue a loan from a bank on your own. However, the Small Business Administration (SBA) also offers a guaranty program for loans. The SBA does not loan money directly to businesses, but it does guarantee a percentage of the loan. This lowers the risk for banks, credit unions and nonprofit lenders, which makes it easier for businesses to get approved for loans. There are certain standards you must meet to qualify for this guaranty program, and certain types of business may not qualify.

Venture Capital

Venture Capital firms invest large sums of money in businesses, usually in exchange for a stake in the company. However, the competition for venture capital investment is intense, so the firms are very selective about which businesses they invest in.

Angel Investors

Angel investors are individuals interested in investing in startups. Typically, an angel investor asks for a stake in the company in exchange for his or her support. Finding an angel investor can be difficult, and again, the competition for this kind of investment is fierce. According to Money Crashers, organizations like Go4Funding, MicroVentures and Investors' Circle are a good place to start.

Finding money to start your business may take some time. You may also use multiple sources to fund your business. If you do enter into an agreement with another party, just make sure you put your terms in writing and have a legal expert review these terms.

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