Starting a business is hard. It's not enough to simply have a great idea. You also have to have the financing to make your dream a reality.
Getting money has always been one of the biggest challenges facing new entrepreneurs. The recession has made it even trickier. Even though you might have a great business plan, the financial meltdown has left credit tight and has caused many investors to become more cautious when it comes to parting with their hard-earned money.
Experts predict that the small business lending market will become a little friendlier in 2012. Even so, financing your business venture will take careful planning, creative thinking and a lot of elbow grease.
Below is an overview of some common sources of small business funding and how they are expected to fare in the new year:
Bank Loans: Since the recession, overall bank loan balances in the United States have fallen by more than 10 percent. While large banks have cut back on their small business loans, community bank lending is flourishing. Experts say smaller community banks are they way to go in 2012.
Government-Backed Loans: Small Business Administration loans reached a record high in fiscal year 2011. Otherwise small-business-wary banks like these loans because the federal government guarantees up to 85 percent of the loan if a borrower defaults. Both large and small SBA loans are expected to grow, although entrepreneurs seeking loans greater than $250,000 may have better luck.
Venture Capital: Venture capital investment was up significantly in 2011. However, the firms -- which invest in early-stage businesses in exchange for a share of the new company -- have been affected in recent months by the uncertainties in European and Middle Eastern markets. Experts expect fewer start-ups will receive venture capital in 2012.
Similarly, angel investors -- high net worth individuals who provide venture capital from their private funds -- are expected to become more cautious with their money.
Asset-Backed Lending: Loans backed by collateral have become more popular in the recession. Asset-backed loans are usually more expensive than traditional bank loans, but they can be a great option for entrepreneurs who have not yet established significant credit. It is expected that these loans will continue to grow in popularity during 2011.
Whatever your business goals are in 2012, you'll need financing to make them happen. Consider these options, consult with your lawyer and your advisors, then choose the path that makes the most sense for you.
Source: Entrepreneur, "Top Sources of Small-Business Financing in 2012," Catherine Clifford, Jan. 3, 2012