A business may face numerous challenges but when it comes to startups and small businesses, the usual headache is access to finance. A small business may seek funding for many reasons such as expansion, purchase of input or assets, to scale up more quickly and so on.
However, knowing what sources of funding are available to an SME can be a bit of a task sometimes. This write up will take you through some sources of finance available to small businesses.
What are the best sources of funding for small businesses?
1. Owner’s Capital
When starting a business, the first potential source of finance is the personal investment from your savings. It is always helpful to have some reserved money for your business journey.
The advantage of this action is that, it is considered by external financiers as a commitment to your business, which could encourage them to take the risk to invest too.
2. Borrowings from Family and Friends
This type of business financing is what I called the ‘trust funding’. It is an ideal move to try raising some cash from your trusted network of close people.
Unlike banks and other external funders, your friends and family will always be willing to support you because they have faith in you or your ideas.
Although the money they may give you (either in form of loan or kindness) may not be much, the merit is that sometimes it attracts no interest at all with a more flexible terms of payments, compared to banks and other lenders.
3. Lease Agreement
When your business does not have enough capital to purchase assets such machinery or vehicles that are needed for a limited period, leasing those assets rather than purchasing them is the way to go.
The advantage is that, you to only pay for the value of the asset over the period used. This saves hurdle of having to raise capital for those assets.
4. Small Business Loans
Some banks offer SBA loans at reasonable rates, and there are good reasons why your business needs a loan The SME can secure a good amount for a longer repayment period if it can provide collateral or personal guarantees.
The owner of the small business must note that, loans are a source of debt finance and should not be a first option. Aside the much paperwork needed to secure an SBA loans, there are many reasons why banks reject loan applications. However, when it becomes necessary, it is always helpful to understand the details of the loan agreement before consenting.
5. Trade Credit
With trade credit, SMEs, just like any other businesses can take credit or negotiate favorable payment terms with their suppliers. This is more likely when you have a good relationship with your supplier or you are among the largest of customers. Then, you are in a good position to even discuss discounts and a longer credit period.
6. Angel Investors
Angel Investors are affluent private individuals who have funds to invest in new businesses or start-ups. Angels are a good source of seed funding for an early stage business or project.
The fund is provided in return for equity ownership in the business and there is usually no obligation to pay back should the business project fail. Aside the provision of capital, angels are also experienced entrepreneurs with knowledge in specific sectors.
They can provide mentorship, business advice and valuable networking opportunities that can help your business grow and succeed.
7. Small Business Competition
These days, there are a lot of business competitions open to startups and SMES. Social enterprises and some private individuals organize business competitions where startups and SMEs can pitch their ideas for funding.
Ideas considered worthy by the panel receives lump sums to start up the idea/project or scale up. Small business owners must research, and take advantage of this ‘free cash’.
8. Hire Purchase
This source of finance is very good for SMEs that needs machines for long term production but doesn’t have sufficient capital. Here, the asset provider will give you the asset for use after an initial deposit, usually 10% of the cost.
The remaining amount must be paid at regular intervals over an agreed period. The SME owner can only claim ownership of the asset with a final payment of the purchase value.
9. Venture capital
Venture capitalists are subsidiaries of larger company that have huge sums of money to invest in small businesses with good record of revenue inflows and startups with high growth potential.
The aim is to invest, own significant shares in your business and sell them at a profit in the future. Venture capitalists also provide technical advice to drive growth.
SME that has less capital but a business idea that may create high investment returns can opt for venture capital.
10. Small Business Grants
Small businesses contribute much to the GDP of many developing countries, hence governments in those countries usually allocate parts of their budgets for SME development through initiatives.
SME owners must research these sources and take advantage. Small businesses can also explore private and government grant opportunities in their countries
11. Retained Earnings
A lot of small business owners go through the mill to access any form capital to boost their businesses. I put this point last because it the most ignored source of finance for SMEs.
Retained earnings is that part of profit that is kept in the business. That amount is ‘ploughed’ back into the business, and not distributed among partners.
Retained earnings is the cheapest source of finance for small businesses, and business owners must begin to explore this option.