Finding Finance for Small Business

Finance for Small Business

Some businesses require little more than pocket change to get started; others need hundreds of thousands of dollars or more. Whatever amount is needed, bear in mind that raising money is meant to be a difficult process. The obstacles and problems inherent in obtaining money, particularly from a lending institution, are designed to filter out those who are unfit to survive. Put another way, if an entrepreneur fails to raise enough cash to get his or her ideas off the ground then he or she has shown a lack of what it takes to run a business. There is nothing new in this. ‘Starting a business is easy,’ they says, Welcome to the world of commercial enterprise where after 50 doors have been slammed in your face the next one must still be approached with courtesy, optimism, and a smile.

Sources of Finance

The trick to finding capital, say some entrepreneurs, is getting it from the right sources and in the right sequence as a business grows and evolves. This means that when searching for funding every available avenue should be explored. Learn from every approach. For example, if a loan officer at a local bank turns down your request, politely ask why and use what is said to improve the next pitch.

Often enough it’s not what a money lender is told, but what the money lender wants to hear that is most important. Furthermore, when looking for lenders, try to find ones that specialize in the specific industry or field in which the proposed business is located. Investors are usually more receptive to industries and businesses they understand.

Following, in alphabetical order, are the most common examples of where money can be obtained. Ask around and investigate to determine how each option in your region can be maximized:


Winning over a bank is one of the highest hurdles a start-up business faces. Banks are necessary to small business operators for two reasons, (1) they’re a safe place to store money, and, (2) they can be a source of finance and other services. Unfortunately, most banks enjoy loaning money to people and businesses that don’t need it. This is because every bank wants to ensure that it gets its money back.

Note also that:

  • Banks are by nature cautious. Requests for money must therefore be backed up with firm facts and figures.
  • Banks seek security in the form of proven cash revenues or collateral. If you don’t have one or the other, you probably won’t get a loan.
  • If a bank is uncooperative or uninterested in your needs, move on to another one.
  • Banks do not exist to help keep businesses afloat.
  • People run banks. If you get to know these people your chances of success may increase.
  • Banks hate surprises. Therefore, if you manage to secure a loan and can’t make a payment on time, you should tell your bank in advance.
  • Banks make mistakes. A study in the UK discovered that up to 20% of the statements banks send out are inaccurate. It’s therefore prudent to regularly check bank statements.
  • Always approach a bank or banker having done a bit of homework. It shows that you’re on top of things, which demonstrates integrity and professionalism.
  • Most banks are often open to negotiation when it comes to interest rates. Don’t be afraid to haggle.

Corporate Venturing

Some companies loan money to entrepreneurs in the hopes of establishing a working relationship with them. This is called corporate venturing. Needless to say, the skill or product of the entrepreneur must be of benefit to the company being asked and be backed by a solid business plan. The company to which the idea is being pitched may also seek some type of equity share (ownership) agreement.

Crowd funding

The practice of obtaining funds by publically asking for small donations has been practiced for centuries. The cost of the Statue of Liberty, for example, was crowd-funded by a newspaper campaign.

Paying for upcoming military campaigns by selling war bonds and writers collecting cash from future buyers to fund an as-yet-to-be-printed book provide two additional examples. Nowadays, more than two-dozen crowd-funding sites exist online. Crowd-funding schemes usually involve either pre-selling a product (which is similar to a ‘production contract’ arrangement) or the selling of some sort of equity in the business that is producing the product. Either way, it can be extremely difficult to generate the attention of individuals and groups without an established network and/or skillful media involvement. An extraordinary public-relations or marketing campaign (and/or incredibly good timing) seem to be essential to crowd funding success. Don’t be seduced by stories that make crowd funding look easy. Without first establishing a vibrant business network, crowd funding can be as fickle and distant as winning the lottery.

Equipment Loans

Expensive equipment (i.e.: machinery, display cases, tools, etc…) can sometimes be purchased with an extended, low-interest loan from the company that produces or sells the equipment. In return, the entrepreneur may be asked to sell or advertise the company’s products in his or her business (usually via professional signs and displays). Talk with suppliers and manufacturers for more information.

Family and Friends

Entrepreneurs that can prove (or have shown) that they’re trustworthy and reliable – and have put together a viable business plan – may be able to find family members or friends who are willing to cough up the cash needed to start a business. Note, however, that these folks should not be rewarded with administrative titles in return for their help (which may create future problems). It’s also usually not a good idea to ask friends and family to invest their life savings in a business (they may not get it back). Since asking friends and family for money is the most personal of routes to take this avenue must be planned with care and forethought.

Government Help

Local, state, and BOT sometimes offer financial resources for small businesses if and when certain requirements are met. Examples include businesses that employ handicapped people (or minorities), businesses located in areas in need of economic assistance, businesses designed to help the environment, or businesses designed to reduce local problems. Contact a local economic development office for details.


Grants provide money that does not have to be paid back. Universities, professional organizations, governments, and trade associations are typical grant sources. The unemployed, pensioners, young entrepreneurs, artists, and other out-ofthe-mainstream groups are usually the most eligible to receive a grant if they qualify – as are competent people who trying to set up a business in an underdeveloped area. For the most part grants do not involve large sums of money – only a few hundred or a few thousand dollars at most – but for a fledgling business a small amount of cash can go a long way toward reducing expenses. Apart from seed funding, grants can also be obtained for employee training, marketing costs, and insurance. Don’t be ashamed to ask for help in the form of a grant. Just be prepared to fill out lots of forms before and after any money is received.

Issuing Shares

The issuing of shares is a finance option that is only available to businesses that are incorporated.

The advantage of issuing shares is that the people that buy them don’t have to be paid back. The disadvantage is that the people who buy shares are part owners of the business and as such they can hold the entrepreneur accountable for whatever he or she does (or doesn’t do). Shares can be used in a variety of ways.

Small Business Administration Loans

Loans available from the Small Business Administration (SBA) include:

  1. Direct SBA loans (which have a low interest rate). The name comes from the fact that this type of loan is issued directly from the government. Unfortunately, because Direct SBA loans are intended for minorities and veterans they may be difficult to acquire if the person requesting them does not qualify.
  • Guaranteed loans are sometimes available to individuals who have been turned down by a bank. The scheme works by having the government guarantee a loan (via a participating bank) on behalf of the entrepreneur. More leeway is therefore usually given in paying the loan back.

Soft Loans

Loans are declared ‘soft’ when they do not require security or collateral, their payback schedule is long, and their due dates are extendable. That being said, every penny that is borrowed must be paid back, with interest, just like a regular loan. Small Business Development Centers, local governments, business-oriented banks, corporations, business trusts, and other business-friendly associations are the best places to look for soft loans.

Trade Credit

Some suppliers do not require payment for the merchandise they sell for up to 30 days or longer – so that the purchaser has time to sell the merchandise before paying for it. If a small business has a solid customer base and it has little doubt that it can shift merchandise easily, this can be a creative way to lower inventory costs and begin trading with less money than was originally envisioned.

Venture Capitalists

A venture capitalist is a person or group that finances businesses. In return, he or she (as part owner) expects to share in the success of the business in which his or her investment has been made while expecting yearly growth rates of up to 40% or higher. Because most venture capitalists are successful business people in their own right, they’re often adept at determining if a commercial idea is a good one. Note that many venture capitalists are not really interested in providing capital for small businesses. Instead, they look for high-flying enterprise ideas that have big profit expectations and will pay back their investment very quickly. Additionally, since most venture capitalists are only in it for the money (who isn’t?) they may sell their shares to unknown buyers in a few years’ time.

Mixing Up the Options

If the sources mentioned above aren’t enough on their own, consider mixing them up. Maybe a local bank won’t lend TSH 100,000 to start a business, but it may consider TSH 25,000. Additional funds can then be obtained from family and friends, the selling off of personal assets, and so on. Still more cash can come from grants or through trade credits or equipment loans. Don’t be afraid to be creative.

Advice from the Pros

  • When in need of finance, shop around, be persistent, and never be afraid to ask for advice.
  • Open up every available line of credit before going into business – even if it means taking on more credit cards. Few institutions will loan money to a cash-hungry business after it has been set up.
  • Ensure that all equipment and machinery is bought at the best price and under the best conditions. Used equipment may be seem like a less expensive alternative to new equipment, but make certain what you buy has lots of life left in it. Entrepreneurs that buy cheap often buy twice. Remanufactured equipment, which comes with a guaranty, is a much safer bet.
  • Get to know your banker before you need money from him or her (i.e.: while you’re still solvent).
  • Being desperately in need of cash is a bad time to introduce you to a money lender.
  • Do your homework before seeking cash. You may need more than you thought. Many entrepreneurs claim that every time they turn around there seems to be another payment that has to be made (for licenses, fees, duties, permits, etc…). Prepare for this fact.
  • Don’t let your business die a death from a thousand cuts. Little expenses add up and they can break a business. Again, factor everything in.
  • After you’ve deduced how much finance your business needs to get up and running, double the figure. (Some entrepreneurs suggest tripling it!)
  • The world is littered with failed businesses whose owners were too proud or stubborn to ask for money when it was needed. Borrowing money is not a sign of weakness, but rather a normal, everyday business occurrence. Know that taking on debt is often a necessity if you’re thinking of expanding.
  • Consider selling equity (shares) in your business as a means of reducing debt. Although this means that the people with equity shares will own a part of your business, you don’t have to pay them back (which can significantly reduce expenses).
  • Lending institutions are more receptive to entrepreneurs that hold production contracts (i.e.: orders for a product). Getting potential customers to order a product before your business gets started may be difficult to do, but it can be done. Use such orders to impress a lender.

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