Not all small businesses need financing. Accurately gauge the need for financing because usually entrepreneurs make mistakes in assessing the need for financing.
There are number of ways in which small entrepreneurs can arrange financing. Some of them are listed below along with brief description.
1. Bootstrapping is when you reinvest the profits of your business. Growth is slow, when you work your way up, but business decisions are under your control.
2. Friend and family loans Arab Americans prefer to get loans from family rather than bank. Getting financed from family is easy in strong families as they are more willing to trust you. Regular meetings and communication is important in order to avoid misunderstanding with friends and family.
3. Savings Utilizing your own saving is one of the most common methods to grow and simultaneously have control over the business decision.
4. Home-equity Home equity may serve as collateral for a home equity loan or home equity line of credit (HELOC).
5. Angel investors These are wealthy individuals who fulfill financing needs of start-ups against convertible securities or ownership equity.
6. Venture capital Getting financed from venture capital is another option. Usually venture capital funds take ownership interest in young companies. They also take part in management of your business.
7. Crowd funding Crowd funding is pooling funds from large number of people, often using internet. Many websites help you in arranging crowd funding for your venture. Some of the sites are Kickstarter, Indiegogo, etc. The highest amount raised from Crowdfunding is USD$70,000,000. This amount was raised by Star citizen, upcoming video game.
8. Rotating saving and credit association In this arrangement members of the association meet and every member pay fixed amount. The total amount is than paid to one member. Same cycle is repeated to pay lump sum amount to every member of the society. When every member has received lump sum amount the association is disbanded.
9. Factoring It is selling your account receivable to financer.
10. Applying for small business loan Akuwat, and Grameen bank are some of the institutions in developing countries for aspiring entrepreneurs.
11. Sale and leaseback transaction A company sells some of its equipment to a lessor, such as a bank or another financial institution, which leases the equipment back to the company. Thus the company is no longer the owner of the equipment but keeps the use of it. This commercial transaction allows to companies to have at their immediate disposal the cash to make investments in new business opportunities.
12. Keep your financing requirement to minimum. Squandering your cash will play havoc with your business. Efficient management is most important thing in keeping your finances under control.
13. Efficient management Keep your debtors’ collection day to minimum.
14. Buying on credit. Buying on credit is another means of financing with added advantage that it is interest free. The down-side is that relationship with client can deteriorate if you fail to pay within stipulated time.
15. Merchant cash advances. It is selling your future credit sales against a lump sum amount. For example if you get 10,000 Rupees lump sum than you have to sell 13000 rupees worth of future sale to the lender.