Small Business Funding
If you’re about to start a small business, or you already own a small business, you may find it difficult to determine the best way to attain funding. Every business is different – finding the funding strategy that suits yours best can be a complicated task. When business owners refer to funding, they’re not just speaking about finance – funding can come from a range of different sources. Depending on the size of your company, and the industry that you’re operating in, there are a range of different options available in the modern business environment.
We’ve created this guide to small business funding to help you have a better understanding of the various forms of funding available for your business. Many business owners make the mistake of not being aware of the different avenues available to them, and it costs them money in the long run. Consider all the different funding routes mentioned in this article and decide which options are most appropriate for your business. If you’ve ever wondered how to get small business funding, this article is for you.
Receiving investment in your company is one of the primary ways owners end up funding a small business. You can sell equity in your company in exchange for capital. This is considered one of the most cost effective ways to raise capital for your business, as you don’t have to pay any interest on the money that you receive from your investor.
Raising money for equity has become synonymous with small business startup funding. This is because many startups have very little assets, and therefore struggle to receive any form of capital from traditional commercial banks. Investors are able to give startups the money they need in exchange for shares in the company. Investors hope that the startup will eventually skyrocket in terms of value, which will result in their equity being very valuable.
Despite the various benefits of acquiring funding through investment, there are some disadvantages to consider as well. Below we’ve compiled a list of advantages and disadvantages to consider when deciding if selling equity in your company is the right way to approach investment.
Advantages of Selling Equity
- Avoiding Costs – You don’t have to worry about paying fees and charges when you raise money via selling equity in your business. Traditional forms of finance often come at a premium that many business owners are unwilling to pay – this is one of the major driving forces behind the popularity of selling equity in companies.
- No Credit Requirements – When you receive investment you don’t have to meet the credit requirements that often prevent business owners from attaining capital.
- Downstream Benefits – One of the most undervalued benefits of receiving investment is the strength of your investor. Once someone has put money into your company, they are likely to help further fund projects as they will be trying to ensure their investment doesn’t fail.
Disadvantages of Selling Equity
- Less Equity for Yourself – Despite the obvious cash flow benefits, the reality is: selling equity means you stand to benefit less from the business further down the road. If you’re someone who wants to own the entirety of your business for the coming years, receiving investment is not the optimal type of funding for your business.
- Less Control – Depending on the size of the equity that the investor purchases from you, you will most likely have less control over your company. Investors will be able to influence the direction of your business, which you may not be okay with.
- Not Building Business Credit – One benefit of using traditional forms of finance is that it typically allows you to build a business credit score, which will result in you having more access to credit down the line. For this reason, it’s important that you try and start building this credit score – it can open future opportunities.
Funding via Finance
The other most popular version of funding for small business is through finance. Financing your operations is one of the most viable ways to start the ball rolling in terms of getting your business off the ground. It’s also a great way to invest in technology or inventory if you need to grow your current operations.
Many business owners try and avoid financing things because of the stigma surrounding interest rates. But what people don’t realize is that financing certain parts of your business can have a great impact on the future profitability of your company. We’ve outlined the various ways you can use finance to fund your business below:
Traditional loans are typically provided by commercial banks to help business owners either start a new business or invest in a current one. This is the most popular form of funding as it typically has lower interest rates and costs less than other forms of finance.
With traditional loans, you receive a lump sum of capital which you are responsible for paying back over a set period of time (term). There is typically a fixed interest rate which you are required to pay back along with it. Many traditional loans will have to be secured against assets in your business.
Business Credit Cards
This is a type of finance that businesses typically use to fund ongoing operations, not start businesses. Business credit cards are like personal credit cards, except they are tied to your business. It is a revolving form of credit: you are given a set limit and you only pay back what you use, and only pay interest on what you use. They can be issued to multiple people working within the company, so it’s a great way to have a way for employees to spend money on business needs. Many people use them to have employees entertain clients or purchase inventory for the company. The only problem with business credit cards is that they charge very high fees for cash advances – if you need to have access to cash in your business, a business credit card should not be the avenue that you take. Because business credit cards are unsecured, they typically have very high interest rates.
Business Line of Credit
A business line of credit is another form of revolving credit. Borrowers are given a set limit on their line of credit and they only pay interest on the money that they withdraw from it. Unlike business credit cards, you don’t have a card facility with a business line of credit. Instead, you will be able to withdraw cash or transfer money from the line of credit. This is a big advantage for many business owners as it doesn’t carry the same hefty cash advance fees that a business credit card does.
Advantages of Using Finance to Fund Your Business
- Retain Equity – You retain all of the equity in your business meaning if you are successful you will have more of the returns that the company provides. This is a top priority for many business owners, especially those who are looking for small business start up funding – they typically believe their businesses have potential to multiply in value.
- Retain Control – This is another valued component of getting finance instead of investment. You don’t have anyone with serious influence over your business decisions.
- Flexibility – There are tons of different forms of finance, which means you’ll have the flexibility to try out a range of different options that will best suit your business needs. Various lenders have different term times and arrangements that can cater to companies in almost any industry.
Disadvantages of Using Finance to Fund Your Business
- Cost – Because you are having to pay interest and fees on top of what you borrow, the largest downside to financing is cost. This is especially true for certain forms of credit that have particularly high interest rates.
- Collateral – Often you will have to sign over some of the assets in your business to secure the loan. This means that the bank can seize your assets or business if you default on payments.
- Eligibility – It can be hard to get financing if you have little credit history or a bad credit report. For this reason, attaining finance is often one of the more difficult ways to get funding for your business.
Other Forms of Funding
If you don’t want to sell equity in your company and you don’t want to take out a loan, there are still other funding sources for small businesses. One of the most common ways that people get funding outside of investment and finance is through a method called factoring. In addition, you can also get grants from the government if your business meets certain requirements. The full details of these forms of funding are provided below.
Factoring is a form of funding that is neither debt nor investment. Instead of getting a loan or selling equity, you simply sell unfulfilled invoices to a factoring company who are then responsible for collecting the invoice when it is due. This is a great way to get the capital you need to keep operations going, without having to get approved for a loan or lose a portion of your company.
Most factoring companies will provide you with up to 80% of the invoice upfront – and only charge around a 1-3% fee once they have collected the invoice. Because you are selling the rights to an invoice, no debt appears on your balance sheet and it does not impact your business credit score. It may appear that factoring is only useful for those who are trying to finance their business as it moves forward, but many people use it at the start of their operations as well. For example, if you have a manufacturing company and have received a large order and don’t have the money to start business, you can sell your current invoice to a factoring company for upfront capital to fulfill the order.
One thing that you must keep in mind is that your client will be notified that the invoice has been sold to a factoring company. This is normally not an issue, but can sometimes give the impression that you are unable to meet your financial requirements, which can reflect poorly on your business’ reputation. It is therefore advisable that you notify your clients prior to selling their invoices to a factoring agency.
Small Business Funding Grants
Small business funding grants are another type of alternative funding that many businesses use if they are unable to get enough money through traditional avenues. Despite being a last resort for some business owners, small business funding grants should really be a first port of call as it is effectively free money. Small business grants are a form of government funding for small business. They provide small amounts of cash for qualifying business owners. Many of these grants are reserved for individuals of a certain background – you should research to see if you qualify for a small business grant – it truly is free money.
This small business funding program is specifically designed to help small business owners with little capital. The government has created the initiative to pinpoint certain segments of the population, as well as certain business types, that they feel have a positive impact on society. Researching grants prior to looking for investment or finance is a great way to save yourself money in the long run, it can also be used as collateral.
After reading this guide you should have a clear idea of how to fund a small business. It may sound like an arduous process, but considering all your options prior to making a decision can be the easiest way to save yourself money in the long run. Many business owners make the mistake of taking the first funding opportunity they’re offered – don’t let yourself act in haste. In addition, if you’re looking for finance, make sure to ask the lender for a total cost and break down of the loan your receiving. Hidden interest rates and fees can sometimes lie inside various loans. If you have further questions, our website has a range of great resources on how to get funding for a small business – make sure that you check it out.
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