We all know that it takes a lot of hard work and money to make an online business successful. Entrepreneurs are hard-working risk takers, so the resolve to pull long hours in the face of unfavorable odds isn’t hard to muster.
Trying to get by on just your savings is not only extremely risky, but it probably won’t get you too far either, especially considering the current economic climate. There are fortunately a number of other funding sources available to online business owners, and we will explore the best ones below.
1. Friends & Family
Many people are naturally hesitant to hit up folks they know for cash, even if it’s for a promising business venture. They don’t want to put those they’re close with in an awkward position or appear as if they’re in some sort of financial trouble. However, people who know and like you are often the best source of seed money, as they know much more about you than a traditional lender ever will.
The key to effectively leveraging your social network is to be extremely prepared. Put together a presentation that clearly relates your idea, outlines your projections for growth and profitability, and is appropriate for your audience (i.e. use a level of formality that makes sense for the group you are pitching). In addition, make sure to have definitive answers for any conceivable questions you might have to field, such as whether money provided is a loan or an investment, and don’t try to hide the level of risk involved. That will only serve to make you look amateurish or delusional.
2. Small Business Loans
You can garner a significant amount of money via a small business loan, but doing so necessitates having solid credit standing as well as providing the lender with some sort of collateral. This could be problematic given that the Great Recession left roughly half of US consumers with bad credit. If you go the small business loan route, you may want to place added emphasis on Small Business Administration (SBA) loans because the government guarantee allows lenders to relax underwriting standards. The following are the three types of SBA loan programs:
• 7(a) Loan Program: Provides assistance to companies with special requirements (e.g. exporters, businesses operating in rural areas, businesses run by people in underserved communities).
• Microloan Program: Provides short-term loans of up to $50,000 to small businesses. The average loan garnered through this program is for $13,000.
• CDC/504 Loan Program: Provides long-term loans at fixed rates for the purchase of business assets or business modernization. This program is geared toward economic expansion through job growth.
3. P2P Lending & Crowdfunding
It’s interesting, there are online businesses that can help other online businesses garner the funding they need to succeed. Some – called P2P lenders – offer the chance to get small recurring loans from a network of people, yet only make one monthly payment to the host site. These loans tend to have fixed interest rates and lower peripheral costs than funds attainable from a traditional lender. Two of the most popular P2P lending sites are Lending Club and Prosper.
There are also sites that allow you to give equity in your company or free products and services to a number of people in return for small financial contributions, through a process called crowdfunding. One of the most popular crowdfunding sites is Kickstarter.
4. Credit Cards
Small business owners are often hesitant to use credit cards as funding vehicles because A) they don’t think their company’s credit standing will warrant much of a credit line and B) they don’t want to use a personal credit card for fear of putting their personal finances at risk. The truth, however, is that your personal credit standing (and not that of your business) is the most important factor in determining business credit card eligibility, and you’ll be personally liable regardless of whether you use a personal credit card or a business credit card.
That’s a good thing too because not only is credit card debt unsecured (unlike most small business loans), but personal credit cards also benefit from protection against arbitrary interest rates, which is lacking for business credit cards.
5. Angel Investors
There are individuals and companies that invest in up-and-coming businesses for a living. They generally provide a significant amount of funding in return for some sort of ownership stake in your business as well as a measure of control over its direction. Angel investors are usually only in the realm of possibility for companies built upon extremely good, unique ideas that have the potential to be worth millions.
In exploring your different funding options, it’s important that you keep in mind the relative advantages and disadvantages of levering debt and equity. Debt is risky in the sense that if your business fails, you’ll be personally responsible for repayment, and that could have negative ramifications throughout your life. On the other hand, leveraging equity requires giving up a portion of your business (i.e. a portion of all future revenue). The options available to you are typically a product of your contacts and credit standing – you won’t be able to get a substantial loan right out of college, after all – but if you have a very lucrative idea, as most entrepreneurs think they do, the value of a slice of your company could end up dwarfing that of a loan.
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