The Top Ways To Fund A Small Business
How To Fund A Small Business
If you are starting a small business or looking to expand then you need to consider what your funding options are. There are a number of ways that any small business can bring in the funds they need to start or expand. It is important that you understand what some of these ways are and choose the one that is right for your business.
Look At Bootstrapping
If you have a business that is already up and running then you might not need to have any external funding for your expansion. Bootstrapping is the term used when a business funds itself. As a business grows it will start to generate funds that can be stored and used for future expansions as part of the profit margin.
It is important that you always consider bootstrapping first before you look at other types of funding. Bootstrapping ensures that your business stays yours and you will not be putting the business or yourself into debt. If you are unsure about whether or not your business can afford to fund itself then you need to speak with your accountant. They will be able to give you a breakdown of the funds that you would have available and what financial strains this could place on the business.
Look At Self Funding
If you have a new business or are looking at starting a business then you should consider self-funding. There are many entrepreneurs who self-fund their businesses through savings or a personal loan. Self-funding is not the best option for everyone and you need to carefully consider this.
There are some points that you need to take into consideration when looking at self-funding. The first is whether you actually have the funds that your business needs. If you are going to be placing yourself in debt then you have to be sure that you will be able to cover the repayments with the income you get from the business. If you are going to be selling off assets to raise the funds you also need to consider if this is the right course of action.
One of the primary advantages of using this funding method is that the business will be yours and you will not be starting with debt. Another advantage is that if you need to finance your business in the future investors will feel more secure because they know that you have a vested interest in the business. Putting your financial weight behind your business could help you in the long-run, but should only be considered if you have the money available.
Looking To Friends And Family
If you are very serious about your business then you are going to need all the moral support and encouragement that you can get. This will generally come from your friends and family, but this is not all that they may be willing to provide. Your friends and family may be willing to provide you with the funds that you need as a loan or for a share of the business.
However, you need to be very careful when you turn to those closest to you for funding. There is always a chance that your business fails or that the expansions you are making will not bring additional profit. These failed transactions could sour the relationship that you have with these people and you could lose friendships or face very awkward family gatherings. If you do ask friends and family for funding you need to ensure that they are fully aware of the risks that they are going to be taking.
Look To Angel Investors
Angel investors are generally people who have money and are willing to invest in your business. The TV show Dragon’s Den is based on this idea and will give you a feel for what your angel investors might be looking for. It is unlikely that you are going to find a single angel investor because they are forming investment groups more and more. This will help the investors spread the risk of the business and pool their resources.
To find angel investors you can look online for investment groups or talk to your local chamber of commerce. The local chamber will generally have an idea about who would be interested in funding businesses in your industry. When you approach an angel investor you will need to present your case and state how much you are looking for them to invest. You will also need to offer them a share of the business which is their return for the investment.
Try Cloud Funding
Cloud funding is very similar to angel investors because you are pitching your business to investors and asking them to provide funding. The primary difference is that this will be done online and not in person. This type of funding is generally successful and you will have multiple investors looking to provide you with some of the funds. However, you should be aware that there are restrictions on how cloud funding works and you need to know this before you start.
Take On A Partner
If you are happy to provide a share of the business to investors then you should consider taking on a partner. A business partner can be a great source of funding and they do not have to be part of the daily running of the business. You could take on a strategic partner who will benefit the business through the aligning of resources.
An example of a strategic partner will be a property management company that invests in a property maintenance company. The property management company will eventually look at feeding business to the property maintenance company. This increases the management company’s profits because they are increasing the business that their investment partner receives.
Look At Venture Capital
Venture capital companies will generally provide funding in the early stages of your business. However, you will need to be careful with this. These companies will generally look at making a large investment which could help your business, but they are going to be asking for a share of the business in return. As they generally invest large amounts they could look at taking a controlling interest in the business and this might be something that you look at avoiding.
Turn To Crowdfunding
When crowdfunding started it was primarily for web-based projects, but this has started to change. If you have a business idea then you will be able to pitch it to thousands of potential investors through a crowdfunding platform. The investments could be equity, debt or a reward-based investment.
There are hundreds of different crowdfunding platforms online and you need to carefully select the one that you want to use. They will all have different terms that you need to consider which could affect your funding.
Get A Small Business Loan
There are a number of small business loan providers who specialize in lending money to small business startups or businesses looking to expand. Most of these lenders will require some secured assets before they provide the loan. The rates for these loans may also be fairly high when compared with other loan types.
When looking at a small business loan you need to be careful when it comes to rates. Some lenders will state that the rate is only 3 percent, but you need to consider what the term for this rate is. Many lenders will have a 30-day term which means that the rate for the year will actually be 36% and this no longer makes it very attractive.
Getting A Grant
A lot of people do not consider grants when they look at funding their small business. However, there are thousands of different business grants that are available depending on the industry you are in and the state. The hardest part about getting a grant is actually finding them and getting through the application process.
Talking to your local chamber of commerce could help you identify the grants that you are eligible for. It is recommended that you ask for advice on the completion of the application because this could become technical. However, if you are successful the grant could easily provide the funding that you need to get off the ground or to expand your business.
Getting A Loan From The Bank
Many people assume that going to your bank for a loan would be the easiest option. However, when you are looking to fund a small business this is not actually the case. Traditional banks do offer small business loans, but they are generally harder to get. You will need to provide a track record for your business or your personal finances and the bank generally asks for the loan to be secured by assets.
If you are going to the bank for a loan to start your business then you will need a solid business plan. The business plan should state where your revenue will come from and how you are going to be getting customers. Having all of this ready when you go to the bank will show that you are aware of your business needs and could help the bank determine the risks of giving you a loan.
Some small business owners consider taking a personal loan to fund their small business. While this is a funding option, you need to be careful because you are personally liable for the debt. If the business fails then you will still need to repay the bank and you may not have the funds to do this.
Looking At Credit Cards
Using your credit cards to start a business is not ideal and should be your very last resort. However, there are many entrepreneurs who have funded the early stages of their business with credit cards. You will need to be very strict with this if you choose to use this funding option.
It is possible to get a credit card that offers very low rates or a period of interest-free credit. However, you need to be able to pay the amount charged to the card quickly to avoid any large interest charges. This is due to the monthly interest charges not being small when they start. Another reason why you need to carefully approach this funding option is that fact that the credit will generally be in your name. Any late payments could affect your personal credit score and you will want to avoid this.
Asset Based Finance
Asset based finance is a good option for any business that is looking to expand. If you have business assets such as equipment or inventory or something less tangible like an invoice, you can use it as leverage for funding. Asset based finance is great for businesses that are growing quickly, but have longer payment terms for their customers.
If you have a number of invoices that have not yet been paid you could use them for funding. The invoice will be an asset that secures your funding, but you need to be careful when choosing the company you work with. If the invoice is not paid in time they will generally take on the role of chasing up the payment. You want to ensure that they keep to your professional standards and do not damage your reputation when they chase the payment.
If you are starting a small business or looking to expand your business then you need to consider all of your funding options. Before you start looking at the options you need to consider what you need to the funds for and whether you are willing to provide a share of your business to investors. If you are not willing to share your business then you will need to look at loans or funding where the investor does not get a share of the business. However, if you are willing to part with a share of the business there are a number of options available including angel investors.