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Writing a business plan is crucial for every enterprise because it allows operating more efficiently, especially with cashflows. Without a clear strategy, it would be hard to distribute costs in a way that, eventually, will generate a profit. In that way, the business plan is especially important for successful financing, as it ensures that all funds will be appropriately used, decreasing the chance of their wasting. One can specify four main ways for financing a small business, each of which has various approaches and characteristics: investing, bank loans, crowdfunding, and using of retained funds.
Investor fundings and bank loans have many similarities: in both cases, an entrepreneur obtains some sum of money that is expected to be returned, but banks and investors have different intentions. Bank officials simply give the money at the specified interest rate, which should be returned in terms (Bellucci et al., 2016). They usually do not require anything except the guarantee that the money will be returned in time. In times of financial crisis, banks are usually unwilling to provide loans due to mutual mistrust (Wille et al., 2017). In general, it is better to use bank loans only in the case of clearly defined and already tried business plans.
Unlike banks, which are interested solely in their money’s return, private investors seek profit in the enterprise’s success: they will own a part of it. Business angels, for example, are successful entrepreneurs themselves, who have extensive experience in business planning and launching, and are willing to help new business people whose they find promising (Lueder & Cadden, 2012). They offer funds and support new businesses in various areas, helping them develop and implement their business plans and strategies. On the other side, venture capitalists are large funds that offer significant sums of money to startups they find promising and watch for them, directing them to success. Those are primarily new companies operating in a high-tech industry, such as IT, robotics, biotechnologies, or AI, by young and active people (Giudici et al., 2021). In that way, finding and attracting the investor is one of the most common business funding methods.
Crowdfunding is similar to investing somehow, but in that case, there are many investors, and each of them invests a relatively small sum of money. It is the alternative funding strategy: crowdfunding platforms flourished with the development of the Internet and became extremely popular in times of financial crisis when traditional approaches such as bank loans became less available (Wille et al., 2017). The main objective for a successful crowdfunding campaign is that the entrepreneur’s project must be interesting and useful for people: for example, solving their problems or being exciting for them. It is one of the best ways to fund a social project or for artists who want to obtain financial support from admirers of their music, painting, or other art.
Using the own retained funds is the least risky but the most time-consuming way, as it requires accumulating money before launching the business. According to Wille et al. (2017), in a 2015 survey of small and middle business owners, 9% of them told that they operated on the retained funds. Such an approach is good if an entrepreneur wants to launch a small project, such as an online store while remaining independent from banks, investors, or social opinion, as in the case of crowdfunding.
In that way, four primary ways for small business funding are bank loans, investor funds, crowdfunding, and personal money usage. Bank loans are helpful in the case of a tried business plan with minimal risks. Investor funding is the most common way that can be used by different entrepreneurs, as there are many various investors with interests in other areas. Crowdfunding is especially good in cases of social important new ideas, new beneficial technologies, or art projects. Personal retained money is the most stable and reliable way to be used in all cases, but it requires time and work to accumulate money.
Reference
Bellucci, A., Borisov, A., & Zazzaro, A. (2016). Bank organization and loan contracting in small business financing. In The World Scientific Reference on Entrepreneurship (In 4 Volumes) (Vol. 2, pp. 171–199). WSPC.
Giudici, G., Sannajust, A., & van Auken, H. E. (2021). Special issue on small business financing: New actors, new opportunities, new challenges.Journal of Small Business Management, 59(2), 219–222. Web.
Lueder, S., & Cadden, D. (2012). Small business management in the 21st century. Saylor Academy.
Wille, D., Hoffer, A., & Miller, S. M. (2017). Small-business financing after the financial crisis – lessons from the literature.Journal of Entrepreneurship and Public Policy, 6(3), 315–339. Web.
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