Understanding Your Options for Funding a Small Business

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Finding the right funding option is one of the main challenges small businesses face, whether they are looking for the money to cover their startup costs, expand, or overcome a rough patch.

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This capital can come from various sources, each one of them having its own benefits and possible risks attached.

To be able to choose the type of funding that is just the right fit for your business, you need to understand what options you have at your disposal.

To point you in the right direction, we’ve compiled a guide for some of the most common solutions.

 

Bank Loan

One of the ways of raising the capital you need is a bank business loan.

Even though banks are getting stricter when it comes to lending money, particularly regarding the credit score requirements, with a good business plan and a well-written loan application, the odds are on your side.

Your personal credit score needs to be outstanding, since the way you manage your personal finances is regarded as a sign of how you’ll handle the finances of your company. Even if you’re a diligent debtor, having too many personal loans or credit cards can affect the final decision of the bank, as getting another one could come off as too risky.

On the other hand, if your credit rankings are far from perfect, you can still apply for a loan by minimizing the risks for your creditors. You can do that by either offering collateral to secure the loan or finding a cosigner ready to share the risk with you.

 

Microloan

Even though bank loans come with the lowest cost possible, they are notoriously hard to get, especially if your credit score isn’t immaculate.

But with the expansion of the alternative lending market, there are now other organizations offering modern loan solutions that might be able to provide you with the capital you need.

These organizations have more flexible criteria when approving a loan, and they tend to analyze the whole picture instead of limiting their decision-making to cold, hard numbers. For example, the popular online lender Cubefunder, whose services are used by many small businesses in the UK, points out that all they look for in an application is a well-run business with a sound revenue flow.

Microloans usually require less documentation, and the interest rates are not significantly higher than the rates offered by banks.

Unlike traditional banks, some of these organizations offer repayment plans that match your cash flow, which can be quite a relief for small business owners. But, even though they come with many advantages and are a great solution for those in need of smaller amounts of capital fast, they are not an option if you’re looking for a large investment.

 

Credit Card

There are entrepreneurs addicted to plastic, using their personal credit cards as startup capital or a source of funding to make ends meet when it gets tough. Credit card interest rates are usually very high, so this kind of capital comes with great costs attached.

Although this is a fast way to get the money you need, and you don’t need to provide an explanation of how you’re going to spend it, this type of funding can be very risky.

You can easily ruin your credit score if you fall behind with your payment, or create a money pit if you just keep paying the minimum each month.

 

Crowdfunding

If you have a business or project idea that you think can get a lot of public support, and doesn’t cost a fortune, you can consider crowdfunding as a way of gathering the capital you need to get started.

You will need to consider how much money you need to raise over a certain period and start a well-thought-out marketing campaign so that your friends, family, and strangers can support your cause. You can consider starting a crowdfunding campaign on some of the most popular platforms, such as Kickstarter, IndieGoGo, or GoFundMe.

The crowdfunding market is expected to experience significant growth in the years to come,  so you may want to try your chances.

 

Angel Investors

If the idea of paying a monthly debt doesn’t agree with you, but you don’t mind giving away a part of your equity in return for financing your business, you can try your chances with finding an angel investor.

Angel investors are high-net-worth individuals who will expect to make a good return on their investment. They often have the experience and expertise to support your business in other ways, apart from financially.

But first, you’ll have to show them just how passionate you are about your business idea and prove to them your potential for success. To do that, you’ll need a perfectly written business plan, as well as substantial insight into the current market and the opportunities it offers.

While angel investments have their advantages, the greatest one being that you don’t need to pay back the invested capital in case your idea fails, there are some disadvantages. By giving away a part of your equity, you no longer have complete control over your business, as angel investors will have their say, too.

 

Venture Capital

Venture capital is another form of equity financing. It is most often allocated to small companies with great potential for growth that are looking for substantial funding for the very first time.

Investors usually have the necessary experience and expertise in the niche and expect an above-average return on their investment.

As you will be giving away a part of your business ownership, expect venture capitalists to be involved in the decision-making process.

The first step is submitting your business plan, and if it looks promising, they will scrutinize your idea and its potential.

 

Friends and Family

Many small business owners turn to their friends and families when starting their own business, when lacking money to expand, or when trying to surpass a dry spell in sales.

Your friends and family can decide to borrow you some money, with or without interest, or be your angel investors if you offer them a part of your equity and the ownership.

Whatever you agree on, be sure to make it formal and put it in writing. That’s the only way you can ensure you’ll avoid any possible misunderstandings or negative outcomes of your financial arrangements.

 

Now that you have some basic insight into the types of available funding, you can narrow your options down to those that are the most appropriate for your current situation and business demands. Before making any final decision, make sure you’ve consulted your financial advisor in order to avoid the most common pitfalls.

 

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