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Finding Small Business Financing

Part 2: Sources of Equity Financing

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For many small businesses, the prime source of small business financing is their own pockets. Small business people invest their own savings to start a new business and keep it up and running. They've either built up a nest egg from employment, or do things such as cash in portions of RRSPs to keep their dream of entrepreneurship afloat.

The good thing about this kind of equity financing is that the small business owner retains all of the equity in his/her company.

The downside is that starting a small business and nursing it through the startup phase into a healthy company can be an expensive proposition. Perhaps that's why so many small business people start their new ventures as part-time enterprises, hanging onto their "day jobs" until the business is able to stand on its own legs.

Even so, the small business person often finds outside sources of small business financing necessary. In terms of equity financing for startup businesses, the most common sources of small business financing are friends and relatives and angel investors.

Both of these groups will expect "a piece" of your business in return for equity financing. The piece may involve a portion of the ownership of the business, or mean that the investor gets to take an active role of some kind in running your business - or both. But this kind of trade-off may be necessary for you to get your business off the ground.

If your plan for getting equity financing involves attracting investors, How to Find an Angel Investor and Prepare an Investor Ready Business Plan give tips for making your search for investors more successful.

Once your business is established and has a proven track record, there will be more sources of small business financing available. You may be able to attract venture capital, for instance, or take your company public, selling shares in your company on stock exchanges.

Certainly once your business is established, you'll be able to use your retained earnings as a source of small business financing. Ensuring that you invest some portion of the money your small business makes back into the business is one of the cornerstones of a healthy financial plan.

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