Before leaping into a new business opportunity, most entrepreneurs face the challenge of securing working capital. Although it’s not an easy task, it is essential to getting your idea off the ground. It’s also not a decision to take lightly, as the choice you make will stick with you for years to come, even after your business starts making a profit. You can set yourself up for a win by researching the different avenues available and deciding the best action for your specific needs. Here we evaluate four of the more common options owners consider when deciding how to finance a business.
How to Finance a Business
When it comes to business financing, there isn’t a right or wrong answer. Business owners must take their situation into account to plan for the best possible outcome.
Small Business Loan/SBA Loan
Last year, 43% of small businesses applied for a loan from a small business lender. Bank loans and lines of credit are a popular business financing choice for a good reason. They’re a reliable source for a short-term loan that allows you to grow. But, you want to be selective when choosing who to finance through. Banks, private equity firms, microlenders, and other venture capitalists are concerned with getting their money back, so they tend to charge high-interest rates. If you have a good credit history, you can do some shopping around to find better rates. Also, be sure to apply for loans through the U.S. Small Business Administration. They tend to have more flexible terms and lower interest rates.
We commonly see business owners acquire capital from an angel investor in exchange for an equity position. This is often sought by businesses that lack the cash flow needed to obtain a traditional bank loan. It’s less risky than taking a business credit card or a short-term loan. But, it comes with other setbacks that some aren’t willing to look past. Equity financing means forfeiting some control to a partial owner and granting this person a say in the business’ operations. Additionally, this person will receive a share of profits if you decide to sell. For this reason, you’ll want to make sure you can work well with this person for the long haul.
Crowdfunding is an increasingly popular option, especially amongst business startups. Rather than acquiring a business loan from one financial institution, some business owners choose to raise small amounts of funds from a large number of people. Over 600 crowdfunding platforms exist, where billions of dollars are raised annually. Typically, the more successful crowdfunding campaigns offer something in exchange for a donation. Whether that’s exclusive member access or a free product/service, it’s good to come up with ways to incentivize your donors.
Personal Investment/Borrow From Friends and Family
The last business financing option we’ll touch on is actually the one you should start with. Before seeking external funding, it’s best to try to raise as much as you can on your own. You should never put up your entire personal savings; you never know when an emergency will arise, and you’ll need cash-on-hand. But, again, lines of credit can be costly with high-interest rates. If you can cover a lot of business needs yourself or seek a low-interest loan from friends and family, you can save in the long run.
Acquiring a small business loan is a big step in the business buying process. You’ll need to make sure you can afford the monthly payments and have a good enough credit score to be accepted for a loan program. Contact us for more information on business financing and help with preparations.