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Small Business FinancingEvery small business needs finance for investments and working capital. Below, we will outline some sources for small business financing. Financial InstitutionsFinancial institutions, such as banks and credit unions, are often the first point of contact for people seeking small business financing. However, when contacting a financial institution for business financing, keep in mind that financial institutions are risk-averse by nature. It is unlikely that your financial institution will grant you small business financing, unless you have some assets backup. Then your financial institution will probably take out a mortgage over these assets in order to minimise their risk. Venture Capital Small Business FinancingVenture capitalists make money by buying into companies at an early stage and then selling their shares to other investors later on. Venture capitalists engaged in small business financing are taking on a significant risk in return for a potential share of a large profit that can be made in the future when the business is successful. When considering venture capital small business financing, keep in mind that you will give up a significant portion of your business return for getting a capital injection. While this seems to be a very attractive proposition at the start, it is less attractive when your business becomes very valuable one day and a large part of the profits goes to the venture capitalists who have provided the small business financing. In brief, venture capital small business financing is suitable if you cannot do otherwise, for example if the capital helps you to grow the business significantly more quickly and to a larger size than otherwise possible. If this is not the case, venture capital business financing is probably not the right option for you. Business Angels Arranging Small Business FinancingVenture capitalists normally want to see some proof of a working business model. They normally invest in small businesses that have been around for some time, but that have the potential for significant growth given enough small business financing. Venture capitalists are unlikely to invest into a business plan alone. In such a situation, a business angel may be the right answer for you. Business angels are successful business people that invest time and money to get a business idea up and running. They act as mentors for small business people and provide industry knowledge. Business angels can arrange small business financing for you, in order for a small share of your business. Small Business Financing From Friends and RelativesPeople considering setting up a small business often ask friends and relatives for help with small business finance. Often it is not even necessary for somebody to give money. They can simply act as a guarantor. For example, parents may guarantee for money borrowed by their children with the value of their real estate. A bank will then provide small business finance, but have a mortgage over the parent’s property. While this sounds like an attractive proposition, it is often fraught with difficulties, especially if the business goes wrong. The parents may then face the risk of losing their property.
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