There is often an instinct for individuals to keep their personal life and their business life completely separate. When it comes time for an entrepreneur to raise funds for their small business venture, it is commonly believed that seeking a loan from a financial institution or professional investor is the best strategy.
Loans, as well as funding from friends, family and community members, can provide a startup with many benefits. If you are just starting out in the business world and don't have a track record of financial success, you want to look for backers who have a personal reason to be invested in your success.
"Do you believe in your business plan?"
Do you believe in your business plan? If you truly think your venture is worth the time and investments of others, then you should be willing to put some of your own skin in the game.
Personally investing not only demonstrates confidence in your endeavor, but also gives you control of your business instead of selling ownership to others. Many an individual has worked a job just to save up enough money to strike out on their own, or used a personal credit card for initial funding, putting their own savings on the line. It's become a growing trend. The Hartford Financial Group reported that in 2013 millennials were three times more likely to put up their own retirement savings to start a small business than previous generations had been.
This can be scary, but it could also serve as an important first step. By responsibly using your own initial capital, you can create a pattern of smart money management and handle the crucial initial phases of the business launch on your own. Keep track of the documents and records involved in your personal financing to demonstrate your money management skills to future investors.
Friends, family and peers
People who are close to you are likely to support your dreams. Entrepreneur Magazine suggested those planning to start a small business look at their social circles for backers.
Each person you know may have something to contribute. Very close family and friends are more likely to put some money towards your success, but other people you encounter on a daily basis could have something else they can offer. You could seek financial advice from those at your current job or other business institutions your frequent. Friends who also own small businesses may provide leads on where they found investors.
If an informal investor, such as a friend or family member, does provide you with some monetary funding, try to formalize the process. Decide if you want to give them stock in the company's success or if it will be a short-term loan. Draw up papers and exact terms for the investment. Having proper documentation will decrease the chances of miscommunication. This paper trail will once again demonstrate to future lenders you are able to put invested capital to good use and pay back your loans.
A community wants its companies to succeed. Small businesses provide the economy with diversity and growth. They give towns and cities a sense of atmosphere and uniqueness. Local businesses also mean local jobs.
It is possible that local businesses or members of your community would be willing to put up money to increase the foot traffic and tourism in their downtown area. Time shared the story of an entrepreneur who was able to fund his growing company by selling local supporters equity in his business. By encouraging community members to buy private placements, he was able to raise $150,000.
Time magazine suggested when you do approach an actual financial institution, you should think smaller. Local banks are usually more practical for first-time business owner than larger financial institutions. Banks offer lower interest rates than most formal lenders, but some entrepreneurs are afraid to approach them. Banks have a reputation for being very strict during their loan approval process, but this is a misconception. The Wall Street Journal shared University Business School studies showing small businesses are more likely to receive bank loan approval than they think. The studies concluded one to two-thirds of businesses that were discouraged from approaching a bank for credit would have been approved if they had tried.
Those looking to start a small business should approach a local banking expert about business loan strategies. A smaller bank should be willing to give you personal business banking options and provide advice for how to make sure payments go smoothly. A local bank is usually very invested in the financial success of its community members.
For more information about smart ways to manage your finances, contact Landmark Bank
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