Among other things, small businesses need funding to grow. With proper funding, a company can expand, increase its inventory, hire new workers and improve its products, while inadequate funding causes stagnation and can even drive a business to a halt.
On the bright side, we have a variety of funding options to choose from. But before starting the search for new funds, a business plan must be set in place – a plan that includes risks for investors and the means of paying the funding back.
In this article, we talk about the three top-picked funding options that small businesses can use.
Best suited for companies with products or services that capture the public’s eye. Crowdfunding websites such as Kickstarter have become popular in the last several years as a way of raising money from the public for various ventures. Investors help to get a business or an idea off the ground, while they get rewarded with equity or perks.
You create a crowdfunding campaign on any of those platforms and set a funding goal. Numerous contributors then ‘donate’ cash in favor of your cause, and once the goal is reached, the funds become accessible – minus the percentage for the platform. Crowdfunding is an excellent path for product pre-selling and receiving investments to build them.
Although, it is not without its problems. Equity crowdfunding lets investors get a stake in the company, while stern security rules and laws apply to entrepreneurs and investors alike. Crowdfunding is time-consuming, platforms take five to ten percent of total cash raised and it’s a competitive place with many businesses fighting for the same funds.
Contrary to popular belief, the terms "loans" and funding are not synonymous. Loans are just one of the available funding options, however, over the years, they became the most dependable way of funding business ventures.
Loans may not be suited for everyone as they require good credit scores, a company that exists longer than six months and a strong cash flow. You can check your credit score for free on websites like WisrCredit that offer a comprehensive view of your credit health.
Term loans offer an up-front sum, which is then repaid with interest as time passes, which is useful when there is a need to cover big and planned costs. Often with hefty sums of cash involved and good interest rates, they still come with penalties for early repayment.
On the other hand, lines of credit give you almost instant access to funding. This is great for companies that experience cash flow problems such as when there is a need to complete payroll before the invoices are received. They offer consistent access to funds rather than a big amount up-front, and the interest is paid only for the money used. But there is a risk of losing it if the revenue rates drop.
“Love money” from friends and family
The roots of the economy as a word are from Greek oikonomia – house management. From ancient times, most businesses started as family businesses. It is only natural that the first people who heard your business idea were your family and friends. Hence, they usually are the first people you try to borrow money from.
This funding is only viable if your family and friends have big amounts of cash that they don’t require. However, simultaneously mixing finance and personal relationships may turn troublesome later. When borrowing money, be clear about the terms for repaying. You can even hire a legal professional to draft the loan paperwork so that everything is official and properly understood.
While it is the simplest and the most straightforward manner of receiving financial aid, remember that family and friends always like to give you unsolicited advice. Borrowing may aggravate this to unbearable heights – they’ll even start to teach you how to run your business.
There are other options we didn’t have time to write about, like peer-to-peer lending as a system of borrowing without using banks or central institution and angel investors that exchange their money for a percentage of shares in an enterprise.
The kind of funding you choose can either enhance or lessen your business success. Make a careful choice, and plan everything thoroughly, especially how to pay it back, beforehand. In this way, you will ensure that your business has the investments it requires to flourish and grow.