Microlending (www.kiva.org) is another interesting concept for financing a small business. It cater prominently to the poor who cannot provide any security or collateral, by rotating the capital provided by other small business owners.
Another way of securing financing is to get a personal loan under the business name. Home equity loan and home equity line of credit are the two most common ones. The entrepreneur’s home is the collateral and the borrower is locked into a fixed term for five to thirty years. Under the equity line of credit, home serves as the collateral and interest is paid only on the amount used.
Insurance Policy Loans
Insurance policy loans use the cash value of a person’s life insurance policy as collateral. One can borrow up to 80% of the surrender value of the policy. If the entrepreneur fails to repay the loan it is automatically withdrawn from the insurance death benefit.
Angel investors are the first source of equity for a risk capital. With familiarity in the nature of the business, they will put in money at their own risk. These high net worth individuals often have their own agenda and operate through managed networks. Research indicates that they invest 5-15% of their investment portfolio in this way and their motivation is financial gain through capital appreciation. Most of these individuals back people rather than propositions. Having good network in local community will be of great help to a small business owner. Nothing sells better than personal passion. If the entrepreneur can convince a local angel investor, that will give him the local support and authenticity to his business. It also establishes the business brand value. Most of these angel investors invest in businesses located within close proximity to where they live.
The last financing option is venture capital. Venture capital providers are investing other people’s money often from pension funds. Their agenda is to invest money for a larger stake in the start-up. The venture capitalist acquires an agreed proportion of the share capital of the company in return for providing the requisite funding. It is a medium to long term investment of money, time and effort. VC’s aim is to enable growth companies to develop into major businesses of tomorrow. They go through a process of due diligence which involves a thorough examination of both the business and its owners. The investment is expected to be paid off within seven years. Raising venture capital is not a cheap option. They exit their investment at some stage and often through a public offering.
The above mentioned are just a few funding options to get started in the business path. It is not an exhaustive list, but will definitely get a novice started. In practicality, one should do an analysis about what are all the resources available and which ones suit their needs best, before jumping in to get a loan or a grant.
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