The Ins And Outs Of Business Financing Options
For small businesses looking to expand their ventures, figuring out financing options is often the largest roadblock on the path to success. The difficulty of gaining access to funding is often only further compounded by the apparently ever-increasing number of avenues through which funding can be attained.
There are many different methods you can use to fund your business, but you should know what separates each option from one another.
Funding Through Personal Savings
Financing a startup or small business through personal savings can be tempting, particularly for those with a 401(k), or for younger entrepreneurs with a trust fund.
The benefit of funding a business venture through the use of personal savings is that it eliminates the need for initial investors or debt funding. Because of this, it can be a great way to fund product prototypes or a small ad campaign to get a new business off the ground.
However, financing through personal savings is very much a high-risk, low-reward strategy. Unless you have exponential savings, you likely won’t be bankrolling a high-profile ad campaign or working wages with your personal funding. And if your efforts don’t pay off, then you’ve succeeded in not only tanking a new business but also your nest egg along with it.
Funding Through Friends And Family
For many entrepreneurs or small business owners, friends and family can be a great source of initial financing in order to get a business off the ground. However, unless one of your family members or friends is uniquely well-off, you shouldn’t expect for your friends and family to provide you with statistically significant funding for your venture.
If you’re using friends and family to fund your business, act professionally. There’s a good chance that they might never recoup on the funds they give you, and they should know that. Additionally, you should prepare a formal business plan that you then present to friends and family in a professional way, instead of guilting aunt Meridith into giving you an extra $200 in her next birthday card for you.
Funding Through Investors
There are several types of investors, entrepreneurs and small or medium business owners can look to for financing – the most common types of investors you’ll encounter will be angel investors and venture capitalists.
- Angel investors are looking for a business they can believe in, in an area or industry they’re passionate about. Because of this, they often have decent terms when it comes to investments and loans. However, angel investors want to know they’re putting their money to good use. For this reason, make sure that you have some experienced team members who are experts in their fields on hand when you’re pitching to an angel investor, and make sure your pitch is down pat.
- Venture capitalists, in contrast to angel investors, won’t be as concerned with your industry or business ethics as they will with making sure they get a return on their investment. They often expect a lot from the businesses they invest in, and they won’t wait around to get their returns, either. However, because they often have immense amounts of capital at their disposal, for small businesses with a proven model that only want to expand, venture capitalists can be a good bet.
Regardless of what type of investor you’re aiming for, you’ll need to make sure your business is attractive enough to get investments. Have a formal business plan and sales trajectory. Keep your books immaculately.
Have your pitch down pat. If you can’t convince investors they’ll get returns for investing in your business, you’ll quickly be ejected from every conference room you set foot in.
Funding Through Credit Cards
Credit cards represent one of the most common methods for startups or small businesses to “fund by debt,” or in other words, fund new ventures by taking on company debt.
However, in order to get a business credit card, you’ll need a good personal credit score, or a good business credit score (which 45 percent of small business owners don’t even know they have, and which 82 percent of small business owners don’t know how to interpret), giving credit card funding a barrier for entry. Since credit card debt and cash advances can be expensive when compared to other financing options, credit card funding can be risky. However, it’s still useful for small businesses looking to create a prototype or fund an ad campaign without investors.
Funding Through SBA Microloan And SBA Loan Programs
If you’re looking for a loan of $50,000 or under, chances are a major bank will turn you away. For this reason, microloans are useful. The U.S. Small Business Administration (SBA) will connect small business owners to microlenders, and also lets small business owners apply for SBA-backed loans. The average SBA loan clocks in at about $13,000.
Funding Through Business Loans
Qualifying for a loan with a major bank is majorly difficult, which is why it’s uncommon, particularly for small businesses. However, loans from major banks usually have some of the best terms of agreement, and can provide you with massive financing, so if you can apply for one, you might as well give it a shot.
If you’re having trouble getting a loan from a bank, consider looking at taking out a loan from a credit union. Credit unions have slightly less favorable loan terms than major banks and are also easier to petition.
Obtaining a loan from any sort of financial institution without collaterals or a good credit history will be difficult, so if you lack either, you may want to rethink your options.
Funding Through Other Means
- Factoring, a method through which a company sells receivables at a discount in order to ensure some cash up-front, has fallen out of style. However, for businesses with poor credit, it can still work. However, understand that most factoring companies will give you terms that equate to you taking an agreement with an annual interest rate of around 24 percent, so beware.
- Crowdfunding is another great option, particularly for startups or small businesses looking to diversify with a specific project or product. Crowdfunding can be remarkably successful – just take a look at up-and-coming video game Star Citizen, which was able to raise almost $150 million through crowdfunding However, crowdfunding often only works if you already have a complete pitch, business plan and sales trajectory, along with prototypes to show for it, so if your funding goals are nebulous or disperse, you may want to look elsewhere.
Are you an entrepreneur, small, or medium business owner struggling to find financing for your ventures? Let us help! HJR Global specializes in providing funding and other resources to business so that they can reach their true potential. To contact a member of our team and learn more about what we can do for you, click here.
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