Starting a small business is no easy feat. There are plenty of challenges you’ll face as a small business owner, like funding your business.
Financing can make or break a business. It determines the opportunities you can explore and how much risk you can take. Ultimately, it’s the key to guaranteeing long-term growth and success in today’s competitive market.
If you’re looking for new ways to fund your venture, you’ve come to the right place. In this blog, we’ll explore eight financing options to grow your small business and how they work.
Eight Different Ways You Can Fund Your Small Business
Small business owners like you can explore a variety of funding options for your small business, such as:
Self-funding
Most small business owners start their ventures using their personal savings. This approach is called self-funding.
In self-funding, business owners use their financial resources to support their businesses. This means tapping into their savings account or using their personal credit card to buy inventory.
What makes this approach great is that it gives you full control of your small business. However, it does put you and your assets at more risk than you realize.
If you invest all of your savings into your business and it fails, you’ll lose all your hard-earned money. Furthermore, you can be held liable for any loans you won’t be able to pay off.
Business Loans
Taking out business loans to start a business is very common among small business owners. There are various types of loans you can apply for:
- SBA Loans
- Term Loans
- Equipment Loans
SBA loans are granted by the US Small Business Administration (SBA). These loans come with a guarantee from the federal government that they’ll repay up to 85% of the loan if the borrower defaults.
On the other hand, term loans are given by banks and other financial institutions. When you take out a term loan, you must repay the borrowed money over a fixed time and at a certain interest rate.
Lastly, equipment loans allow business owners like you to purchase equipment. Under this loan, the machinery you purchased will be the collateral. If you default, the lender will then resell the equipment as payment.
Securing a business loan is not easy, especially when your business is new and it doesn’t have a good credit score. Fortunately, there’s another similar financing option you can try.
Business Lines of Credit
A business line of credit is like a credit card. It has a limit, and you only have to pay the money you borrowed and its interest rate.
It has two periods: the draw and the repayment period. You can access your credit line during the draw period, which typically lasts from 12 to 24 months. Once this is over, the repayment period starts, and you have to pay off what you borrowed before it ends.
This option is perfect for you if you want to fund projects with no determined cost. However, most lenders who offer lines of credit require applicants to have a good business credit score.
Angel Investors
If you want to avoid taking out bank loans, you can look for angel investors to fund your business. Angel investors invest in startups and small businesses in exchange for an equity stake.
They’ll fund your venture, but you must give them ownership and control of your business.
Crowdfunding
Crowdfunding is where you raise money to fund your venture. There’s a variety of crowdfunding platforms online that you can use, such as Indiegogo, SeedInvest Technology, StartEngine, and more.
You can pitch your business plan on the platform, and if people are intrigued by your venture, they can donate in exchange for a discount code or a free item.
When looking for the right platform to use for your financing, you must check their terms and conditions and platform fees. Platform fees are deducted from the donations you collect on your campaign. Percentages typically range from 5% to 12%.
Venture Capitalists
Venture capitalists are major firms that help start and grow companies. They look and invest in small businesses that have the potential to become successful. They’re similar to angel investors who will fund your small business in exchange for partial ownership.
The only difference between the two is the amount of investments they make. Since venture capitalists have more funding, they tend to make bigger investments than angel investors.
Factoring
Factoring is an excellent way to increase your funding and improve your business’s cash flow.
With factoring, you’ll leverage your outstanding receivables from your customers to borrow money from a factoring company.
Depending on the terms of the factoring company, you can pay off your debts as your invoices get paid, or they may collect the payment straight from your customers.
This approach is perfect if you already have a few customers and need more capital to expand your operations.
Grants
Besides offering small business loans, the SBA also offers through the Small Business Innovation Research and Small Business Technology Transfer programs. These programs are designed to help businesses in the research and technology field.
To qualify for these programs, you must meet its federal research and development goals and have a high potential for commercialization.
Conclusion
When it comes to funding a small business, there’s no one-size-fits-all solution. The right financing option for your venture will depend on your company’s needs, goals, and structure.
Remember, your financing will heavily affect the growth and success of your business. Take your time, do your research, and use the three factors to determine which financing options are best for your business.
