Small business sources of finance are those mediums through which a small business can cheaply borrow money that are used for investing purposes rather than simply paying off day to day charges just to keep afloat.
The aim of this article is to discuss those small businesses sources that work in this information age. Bear in mind that worked 10 to 15 years ago as far as raising funds is concerned may not work in this Google age.
- Personal savings: the most common small business source of finance is from your personal savings. This might not be much but it is a starting point especially when stakeholders in other sources of finance will need to see proof that you are actually committed to the project you are asking them to stake their money on. People of all age one way or the other find a way of saving some of their earnings.
- Network of friends: network of friends is one of the most efficient ways of financing a small business. All you need to do is share your business idea with your friends of network. You will be losing out big time if you fail to tap into this finance goldmine. Most family businesses rely on their network of friends to raise money for their business ventures.
- Crowd funding: crowd funding is a new wave of small business source of finance that entrepreneurs can utilise to raise money for their business ideas. Crowd funding used to be exclusively reserved for start-ups in the techie industry but has slowly found its way into other industries. In the UK for example, sites like UKCFA (http://www.ukcfa.org.uk/) is one of the most popular place to get your business idea funded by crowd with like mind. The idea is that thousands of people invest £10.00 or £15.00 in a project that they believe in. Do an online search to find out which website does crowd funding in your jurisdiction.
- Bank overdraft: overdraft in its simplest form allows a current account holder to use more than they have in their account but not more than you have already pre-arranged. You need to be careful with this small business source of finance as the charges when you use an unplanned overdraft can cause serious financial instability. The rates for overdrafts are traditionally higher than conventional loan rate. Speak toy your financial planner to evaluate your peculiar situation before resorting to this form of raising fund for your small business.
- Small business credit line: small business credit line is similar to an overdraft with the only difference being that your bank pays your bill on your behalf. You can safely refer to this small business source of finance as a company’s credit card. The only difference is that with a credit card you punch in your credit card number when making purchase but with a small business credit line, you simply get your invoice and your bank pays. Revolution and innovations in banks is now making banks consolidate bank overdraft of small businesses with their small business credit line.
- Alternative investment market (AIM): due to the stringent requirement of getting listed in first tier stock markets, entrepreneurs turn to AIM for their small business source of finance. The requirements are relatively easier to meet but the only problem here is that people with low appetite for risk tend to distant from AIM as it is relatively difficult to find an exit route due.
- Private placement: similar to the AIM, private placement is ideal for entrepreneurs to raise money for their business. Depending on the size of your business, you may not want to use private placement as a small business source of finance as this requires some legal procedures that can be costly.
- Peer-to-peer lending: peer-to-peer lending is similar to using your network of friends but this time it is between business owners with some cash to spare.
- Debt factoring and invoicing: debt factoring and invoice discounting is working capital management tool that management use to release funds for other purposes.
- Joining a co-operative society: co-operative societies are old fashioned way of raising finance for your business from friends and relatives that have come together to form a co-operative society. The way this kind of lending circle operates is that members make certain amount of contributions on a regular basis and their contribution will then be given to members who need the money. They are still very much around in our modern society.
If you need more information on small business sources of finance, please do consult your small business accountant and please make you have read this article on how to select a small business accountant. I have intentionally left out government schemes through its Central Banks as this medium of raising money for your small business is not always available depending which government is in power but you can still explore this avenue.