This paper explores the effects of new forms of finance on lending and borrowing. These include peer-to-peer lending, intermediary microfinance (e.g., Kiva), and new types of rewards-based funding (e.g., Kickstarter) that have the potential to resolve some of the problems of conventional forms of finance, community currencies, and digital currencies. They increase both transparency and the options available to borrowers. However, they also create dark places of their own.
The most obvious and easiest way to secure financing for a new business is to use your own resources. For small scale start-up businesses, perhaps growing out of hobbies or spare-time work, self-finance may be enough. Keep your day job and reduce the number of hours you work as the business develops. As long as you generate sufficient cash flow and large enough net revenues to cover the employment income you’ve given up, this is a viable strategy. You might, for example, work as a contractor for a former employer; sell goods and advice to fellow hobby enthusiasts; sell handicrafts or home-made cakes and jam. If the business fails, relatively little is lost, and you can lick your wounds and go back to paid employment.
But where start-up costs are higher (such as for a transport or delivery business, which needs to purchase a vehicle) the need for outside finance is greater. Other types of small businesses have even bigger needs: to buy raw materials, rent business premises, and meet regulatory requirements; to replace the majority of your previous salary; and to pay employees. For costs in the $20-100K range, it is unlikely that your own resources will be enough, and some external source of finance is likely to be necessary.
Conventional financing for new ventures has traditionally come from a number of sources. Borrowing from friends and family (“love money”) is probably the easiest source of funds to secure, after self-financing. Bank loans might be secured by the entrepreneur’s assets (possibly from re-mortgaging her house); or take the form of an unsecured loan or line of credit…
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