Funding is one of the key challenges of starting a business as many aspiring entrepreneurs make the mistake of getting into it with angel investors or their local banks without a keen sense of the numbers. Unsurprisingly, these applications for commercial funding are rejected. To help you get the capital you need to start a business, here are five common financing options to consider:
It’s perhaps the most glaringly obvious option out there, but bank loans are products that few consumers have a solid understanding of. And while lending requirements have become more stringent over the years, mainstream banks have a portfolio specifically designated for small businesses. If you’re unable to secure a traditional bank loan, you may also go for microlending options, which range anywhere from $500 to $40,000. These loans accommodate higher-risk small businesses.
Small business credit cards are a great way to bridge small financial gaps in your monthly business transactions, but it should not be used as your primary source of funding. Falling behind or even paying the minimum monthly amount can put you in a very deep hole that you may never climb out of. Not only do you end up paying a significant chunk of your business capital in monthly interest, but there is a risk of lowering your credit score. Ultimately, a low credit score means you will effectively limit your financing options.
Crowdfunding campaigns are a relatively nascent form of small business lending and borrowing. As with any financing option, crowdfunding comes with its own inherent pros and cons, one of which is that the amount you can borrow is often considerably lower. According to Lantern Credit, however, “crowdfunding platforms offer a way to raise capital without accruing debt this early on in your business’ lifecycle.” Over the years since its inception, variations of crowdfunding have emerged to accommodate different business needs and nuances.
In addition, you can turn to angel investors to fund your startup. If traditional loans and lines of credit don’t appeal to you or, for some reason, are unavailable to you, angel investors are another viable path towards raising capital for your business. Angel investors, like crowdfunding, can offer you financial support without the balls and chains of debt. Instead, angel investors are usually compensated with a piece of the business in the form of shares. Moreover, some deals made with angel investors may carry an obligation to pay them royalties in addition to ownership percentage.
If your business is already up and running and generating revenue, regardless of how small, factoring is a viable financing option. Factoring involves selling your receivables at a cheaper price than its actual value to get usable cash in advance. It’s a financing option commonly employed by companies with low credit scores or by businesses that have to fulfill large orders prior receiving payment.
Family & Friends
Reaching out to your family and friends is one of the most common ways to fund a startup small business. To raise money from your close family and friends, develop a fundraising plan and write up several contracts that express your terms. Make sure that you communicate the degree of risk truthfully and directly. This way, your relationship does not suffer if the investment does not work out as originally planned. By using your family and friends for startup capital, you can access the best financing terms, flexibility when you need it, and extra motivation. Of course, friends and family financing allows you to potentially allow the people you care about share in your success.
To gain a better understanding of what financing option best suits your specific business type and model, look at similar companies in your industry or niche. It will give you a more accurate picture as to how a type of loan/investment works when applied to real-world examples.