So, you have chosen to be an entrepreneur and you have done your homework to choose the line of business in which you have your core competency. Now comes the investment part in the line up of activities. The key question is how much capital is required, how you will you raise it, and how difficult or easy it is to come up with your part of the contribution.
Investing in a new, small venture will be relatively easier if you have savings that can be spared. You can infuse this partly into the venture. New grads, just out of college, with no experience and no capital will face an uphill climb.
Small Business Administration and Business Loans
All loans including SBA loans are debt investments. The United States Small Business Administration guarantees various small business loans to selected entrepreneurs passing the normal business criteria. Business loans, like any other loan types, require a clean credit history and good credit score. But deciding on the type of loan that fits your needs may not be easy. Most small businesses are operated from home, so capital equipment or real estate lease or purchases are not needed and thus do not require investment.
There are loans specific to different investments such as equipment purchase, inventory build-up, real estate property purchase or construction etc. Real estate and equipment loans provide longer terms than working capital and inventory loans/credits.
Working capital loans are mostly disbursed in the form of a line of credit which accumulates interest only for the amount and the time of which it is drawn.
Working capital requirement arises when you have your business up and running. But making arrangements from the beginning, when the projected amount due for a six-month period exceeds your projected receivables is safer.
Loans and credit from friends and relatives can give you flexibility, as there probably won’t be an interest component. Another big advantage of this is that it not only reduces the principle amount from institutional lenders, but can also help slash the interest on it.
Aren’t There Down Sides To Debt Investment?
Qualifying for the loan, which can be an uphill battle, can also have other negatives. Monthly repayments and bills may be fixed but not your receivables, at least until your business gains stability. Missing a few payments can bring you to the threshold of a credit crisis.
Equity Investments
Starting a business entirely with your own resources is every entrepreneur’s dream. You would be the sole owner with no liabilities or loans of any kind. But this can’t always be the case, especially when your capital needs cross your limits. When this happens, getting friends and relatives to invest with you is your best option. The partners in your venture share both profit and loss in the same proportion as this is an equity investment. Venture capitalists and angel investors may be other options, albeit at an advanced stage.
The same risks, as in the case of debt investment, exist here too, but with a distinct difference. For capital losses, you alone are not responsible and your liability is limited to your part of the investment.
Government grants such as minority grants, grants for women entrepreneurs, and disaster funding can be considered. They are some of the more flexible and less expensive options that you can exercise.
Tony Jacowski is a quality analyst for The MBA Journal. Aveta Solution’s Six Sigma Online offers online six sigma training and certification classes for lean six sigma, black belts, green belts, and yellow belts.