Five ways in which small businesses can source capital

“What do you need to start a business? Three simple things: know your product better than anyone, know your customer, and have a burning desire to succeed.”- Dave Thomas, Founder of  Wendy’s

This quote finely lists the elements that lay down the foundation for any small business. Apart from these three main elements, another requisite is undoubtedly capital. Converting a multi-billion-dollar idea to a multi-billion-dollar company requires substantial amount of capital to hire talented resources, create exceptional products, deliver outstanding services and create amazing customer experiences.

When it comes to financing options for small businesses, it’s always wise to diversify your sources of capital. This will allow any small business to better weather any potential downturns and also improve the chances of acquiring the right kind of options to meet specific business needs. A bank is not a sole source of fund for any business and demonstrating that you have used many financing options shows that you are a proactive business.

The funding landscape has changed significantly over the past few years for small businesses. Although there are many sources that can be used to acquire capital, finding the safest options with the lowest risk may be a daunting task. Let’s have a look at the most tried and tested methods of sourcing capital:

1. Bootstrapping

Using your own savings to finance your own business is essentially bootstrapping. With no investors monitoring your decisions, you have all the right to command the direction of your business. Being the only person responsible for the business, you are more likely to study all the possible effects of any decision and hence will be more accountable and focused before taking any step.

2. Business cash flow

The mode of cash flow actually means it is gathered through sale of products, services and is used for paying salaries, purchase of raw materials, transport, vendors and other aspects. There is an inflow and an outflow creating positive and negative cash flow situations. Small businesses need to plan activities and decisions in such a way that uniform and positive cash flow is maintained for most periods of the business. Planning strategies while keeping in mind the needs of the company and regular checks on reports are some tips that you can follow to avoid any cash crunch situation.

To read more on how to manage your small business cash flow, click here

3. Borrowing from third parties

Borrowing from venture capitalists or angel investors is an alternative many small businesses adopt to arrange funds. Angel investors offer money to startups with great ideas in exchange of equity or convertible debt. They are usually your go-to for smaller funds. For larger amounts though, venture capitalists are your answer. In both cases, you need to bring forth your A game with a great pitch to attract the interest of these investors to your business idea.

4. Grants

Small businesses often have an inclination towards taking grants since there is no binding of returning the capital, paying the interest or losing any collateral or property in case of non-payment. Acquiring grants is not an easy process as there are numerous companies and startup ideas in competition for the same amount. Moreover, the amount of grant is decided by the government and is often given to non-profit organisations or educational institutions. Preparing an application that strictly adheres to guidelines as prescribed by the authorities can definitely turn the decision in your favour.

5. Crowdfunding

Crowdfunding is a method in which start-ups can arrange finances by borrowing small amounts from numerous people. With clear business goals and a path to make profit, startups can network with consumers over crowdfunding platforms, gather their interest by exhibiting their offering and ask the consumer to invest in their idea. Communication is key in crowdfunding. Investing in good quality videos, clear and timely communication of your offering will keep the interest piqued of the community trying to help you.

To climb the ladder of success gradually but firmly, you will at some point in your business, require external sources of funding. When you may require funding depends essentially on the nature and type of small business. Funding your business on your own may not be advantageous with evolving demands of the business. Furthermore, having options of external funding enables you to seize market opportunities. As a business owner, you need to ask yourself how much financial assistance will you really need throughout your business and then wisely choose from the options available to you.