In the U.S., lack of access to capital is one of the most significant barriers to entrepreneurship, particularly when you consider the costs associated with starting a business. While many entrepreneurs are familiar with private external financing like equity and loans, there are a broad range of financing options that your business may be able to take advantage of. Find out everything you need to know about access to capital for entrepreneurs and small businesses.
Issues with access to capital
Finance is the lifeblood of business, and it’s normal for early-stage companies to occasionally need capital assistance to stay afloat and finance their day-to-day operations. Despite this, many small businesses and startups find it difficult to get access to capital. In fact, some figures indicate that up to 83% of entrepreneurs find themselves without access to capital markets when they first start their business. This means that entrepreneurs end up relying on their personal savings or investment from family members to get their business off the ground. However, access to capital for small businesses isn’t a lost cause. Here’s our rundown of four potential sources of capital for entrepreneurs:
For most small businesses, access to capital comes from banks. Loans are a very common way to get access to capital, and as barriers to entry are relatively low, most startups should be able to take advantage. One of the key benefits associated with loans is the fact that you don’t need to relinquish any equity in your business, and as many startup loan companies offer generous repayment terms, you should be able to maintain a healthy cash flow.
Equity is a much more uncommon way to get access to capital, although it can have an enormous impact on the stability and financial health of your company. From private equity to angel investment, there are a wide range of equity investment sources to consider. While you’ll need to give up some equity in your company, active investors can add substantial value through connections, industry expertise, and guidance, as well as the initial cash injection.
Business grants are another potential option for businesses seeking access to capital markets. There are a broad range of grants from the government (at both state and federal level) that you can apply for, as well as grants funded by third-parties and charitable initiatives. Although they’re highly competitive and you may need to be in a very specific niche to qualify, business grants can be a superb source of alternative financing. First off, you won’t need to relinquish any equity in your business, enabling you to retain full control. In addition, there’s no requirement to repay the money.
Access to capital for small businesses can be so challenging that many entrepreneurs seek to raise the money themselves through crowdfunding. Simply put, crowdfunding is about engaging “crowds” to co-fund business ideas and ventures, often in exchange for equity in the business. It’s a great way to test the validity of your ideas, while crowdfunding can also be an excellent PR tool, helping your brand gain visibility and buzz. In addition, crowdfunding can help your business secure early users and brand advocates who have a vested financial interest in seeing your company succeed.
Choosing the right source of capital
Access to capital markets is critical for new companies. If you’re unable to gain access to capital through the traditional routes, there are plenty of alternative financing options to consider, including crowdfunding and government grants. Bottom line: with so many potential avenues to go down, don’t be afraid to get creative when it comes to access to capital.
We can help
If you’re in the early stages of launching your company, it helps to have a payments system set up and ready to go. GoCardless offers hassle-free, automated payments, helping you control your cash flow and save time on admin. Find out how we can help you with ad hoc payments or recurring payments.