how to fund a small business

7 Ways to Finance a Small Business

Any new business requires financing for it to launch, prosper and move forward. Without money, your company will never get off the ground, more so grow and expand over time. It’s a fact that both new and seasoned entrepreneurs have to deal with.

As daunting as it may sound to come up with financing for your small business, you probably don’t realize that there’s a myriad of options for you out there. From your own savings to getting small business loans, to taking on partners to crowdfunding and bootstrapping, you can use one or more of these financing sources to make your business dreams a reality finally.

Ways to Raising Funds for Your Small Business

Credit Card

Some people might tell you never to use a credit card to finance your business, but the truth is, the credit card could be one of the best tools in your financing arsenal. It is quick and convenient, straightforward to use and does not come with the nitty-gritty of applying for federal business loans. And when used right, the credit card could also improve your credit score over time.

A business credit card is beneficial in many ways. First, you can use it as a source of revolving credit, and quickly remedy any urgent financial situation without having to through the hoops and hassles of applying for a loan. The business credit card can be used for basically anything your business needs, from purchasing equipment, financing marketing efforts, to recouping financial gaps and anything else in between.

While credit cards give you immense power to do anything with your credit, it is also just as essential to comprehend the risks that come with it. It can taint your credit score, and too much debt could ultimately lead to failure. Therefore, if you are to take a business credit card, consider taking it with much caution. At the end of the day, proper usage of the card allows you convenient access to credit that’s not as quickly available as other forms of financing. On the other hand, if you fail to manage your credit card debt wisely, it becomes a vicious trap that’s often hard to get out of.

Get A Small Business Loan

If your business is pretty much established over the years, you can finance its growth and expansion with the help of traditional bank loans. Several mainstream banks do offer small business loans to entrepreneurs with a proven track record and have some financial history to show.

However, the same can’t be said if you’re just starting the business. The truth is, banks are less than happy and willing to lend you money if you only have a business idea to back you up. With that said, it’s best to consider exploring alternative small business loans options that meet your needs and business profile.

For instance, the US government provides startup business loans through the Small Business Administration (7a) loans. This is a good option since it allows entrepreneurs access to a source of financing with low-interest rates and manageable repayment options. The requirements can be quite stringent though. The SBA prefers entrepreneurs who have shelled out at least 30% of their own money towards the business, and that he/she has some previous experience in the industry. Also, lenders always require would-be borrowers to have good to excellent credit score and submit a comprehensive business plan during the loan application.

Another excellent option for small business loans is micro-loans. These loans are suitable for entrepreneurs who may have a bad credit score, no collateral and don’t qualify for other mainstream business loans. In most cases, micro-loans lenders look at your business and industry to determine the eligibility of the borrower.

Micro-loans don’t promise a huge amount of loan. Most lenders allow borrowers access to $10,000 or less in loans. Borrowers also need to demonstrate the financial capacity of paying back the loan, so another source of income such as salary from your day job and passive investments present a more solid case to the lender and helps in the approval.

Factoring

In cases where small businesses extend credit to customers with a promise to pay some time shortly, it sometimes can’t be helped that the business suffers from a cash shortage at some point. And while the business owner waits for the payments, he needs to do something to fill in the financial gaps.

This is where factoring comes in. Also known as invoice factoring, this is financial solution wherein entrepreneurs sell their customer’s invoices to a third-party at a discount. The entrepreneur gets his much-needed cash in exchange of the account receivables (invoices), and when the customers pay up, the third gives the rest of the payments to the business owner, minus the fees.

Factoring, unlike the methods mentioned above, is not a loan. It is a transaction between the entrepreneur and the third-party who purchases the accounts receivables. Some industries take advantage of factoring as a means to acquire cash, such as in B2B businesses, print, and construction.

Although the fees imposed by the third-party company means you’ll lose a bit of your profit, it also proves to be more convenient and handy than loans that take days and weeks for approval. And when you need the money urgently, factoring can give you that solution in times of dire financial need. When you send the invoices to a third-party factoring firm, you can expect to get the money in a day or two.

Factoring presents some advantages to the business owner. First, it provides instant cash when needed. The sale of invoice doesn’t require credit checks or numerous other documents. As long as the factoring company sees your business as financially sound, then it should be easy to sell your receivables. Second, it doesn’t lead you to debt. It is a selling transaction, and the invoices guarantee that the factoring firm will get their money on the customers’ due dates. Finally, the factoring company takes on the responsibility of collecting the unpaid amounts from customers.

On the other hand, factoring has become less popular because it can also potentially stain your business’ good relations with your customers. The factoring firm has no care whether you decide to extend a specific customer’s due date and they will collect the payment whether or not it harms your good relations with the customer.

Secondly, the costs associated with invoice factoring can get expensive. Although you will get the instant financing you need for your business, it does come with a price. With that said, it is best to consider factoring only under extreme situations for when there’s no other way to source out money. Also, find an arrangement that would work best for you. You can try to negotiate the rates and terms with the factoring firm too so that the agreement works out favorably.

Self-financing

Most entrepreneurs start their own business with their own funds, whether it’s from their personal savings, or using their assets and properties to raise the needed cash.

Using Your Own Savings

According to the data from Small Business Trends, 77% of the entrepreneurs fund their small business out from their own pockets. They use their savings for initial funding. Even if you qualify for bank loans, small business loans and other types of financing, many new entrepreneurs do start their funding, even at least partially from their savings.

Why is savings an obvious place to start? First of all, you don’t have to go into debt. You may have to reduce your savings to finance the business, but that also means never having to deal with interest rates and payments from your lender. Also, since you are putting your own money on the line, you begin to think of your venture more differently. You feel compelled to do everything in your power to make it work, minimize the loss and improve your profit margin. Importantly, you get to have more control over your business. You don’t have to consult with angel investors or venture capitalists for every business decision you make.

Of course, putting your own money at stake has its own disadvantages too. As your business grows, you might need more money to finance it. Taking more and more money from your own savings weakens your nest egg and put your financial future in jeopardy if things don’t work out as planned. So if you’re using personal savings, make sure to know where things stand today and in the future. Determine how much of your savings you can risk, and identify other means to supplement your financing needs.

Remortgaging Your Home / Selling Assets

Another popular way to self-finance your business is through remortgaging your home or selling some of your assets, such as property, boat or vehicle. Some entrepreneurs use this route because their poor credit score disqualifies them for a small business loan from a bank, or they just want more control and freedom in running their business.

With a property as collateral, it is often easier and quicker to obtain the financing you need. Also, you can have the remortgage structured in such a way that it’s still manageable for your finances. And just like using your own savings, you have a deeper motivation to make the business work, or else, you run the risk of losing your home.

Take on partners

Business partnerships are when you take on one or more people on board your business, and you share resources, effort, and decision-making to make the business a success. With that said, you and your partners shall also divide the profits of the business based on the agreement. Many known businesses today once started as a partnership, such as Disney and Microsoft.

With a partner, you get someone to share the financial challenges and shortcomings of the business with. Your business partner is expected to put in resources as much as you do to get the business off the ground and rolling. Additionally, your business partner can pitch in his strengths and expertise to complement yours. You also get to focus on critical points of the business, while the partner focuses on another.

On the other hand, taking on a partner also means you lose some of the control and authority you have over the business. Your potential profits also aren’t your own as well, as your business partner is also entitled to it, depending on how much stocks he owns. And sometimes, the clash of ideas and perspectives can lead to arguments and disagreements, and the business could suffer.

If you’re on the route of taking on a partner, it is best to take someone in you know personally for some time now. He must have strong business acumen as well and must do his fair share of the deal. Importantly, get your agreement into writing. You and your partner/s must be on the same page in every aspect and decision you make for the business.

Crowdfunding

Crowdfunding is a financing process wherein you present your business idea to the public and encourage them to help you fund it. In return for those who pledge for financial support, you need to give each “backer” an incentive of some sort.

Crowdfunding is a popular financing method which allows entrepreneurs to harness the power of the internet and social media to promote their products or services. It is a good way for new business owners to raise some initial funding, and also an inexpensive way at that. Since crowdfunding requires that you engage the audience and encourage them to support your business, you must be able to present your product/service in a very appealing way.

As compared to bank loans and other financing methods, crowdfunding doesn’t’ require you to pay back the pledged amounts or incur interests. However, you do have to provide a tempting “reward” for those people who back you up, and such a reward should be appealing enough that more and more people will want to help you. The more people who show financial support, the more successful your crowdfunding campaign is and the more likely it is for your business to materialize.

Apart from the financial support you can generate from the public, crowdfunding is also an ideal venue for introducing your soon-to-be-business. First, you post your business idea on a crowdfunding site and provide a description. You can then share the campaign with your social circles, as well as ask your family and friends to help spread the word. With that in mind, you are already spreading the word on your business even before it is launched. You are attracting potential investors and customers and generating good traction in marketing and advertising.

However, you want to create a realistic campaign. In some crowdfunding sites, you have to indicate how much money you aim to raise and the timeframe in which you should be able to raise such amount. If you don’t meet these objectives, your campaign becomes a fail, and the financing will not go through. Therefore, even before you start crowdfunding, make sure you have a solid business plan and that you present your product/service in such a way that many people will find it valuable.

Bootstrapping

Many new entrepreneurs have brilliant business ideas, but they don’t have enough cash on hand to finance their business dreams. While others may turn to loans and debts, others explore what they have and make the most of it. This financing process is called bootstrapping.

Even with your limited budget, your business can launch and soar as long as you know how to maximize all the resources you have. With that, you remain to be your own boss, and you wouldn’t have to consult every decision with your angel investors.

Entrepreneurs who bootstrap, or bootstrappers as they are called, generally rely on their personal savings to fund their businesses. This allows them a majority, if not all, control over the business decision.

On the other hand, not having investors and other external professionals on board can make the business seem less credible. The business could look like uninteresting to the eyes of the investors, more so the customers. With that said, bootstrappers have a tall order to fill, mainly because they need to prove their business’ worth. Cash flow may seem slower, and entrepreneurs need to be more laser-focused because they have so much to lose, but those who did bootstrapping successfully also prove that any entrepreneur can stand on his own two feet without external help.

RECAP

Generating financing for your business is probably the most challenging part of launching a new small business, but once you get past this initial hurdle, you also feel that it is most rewarding. Whether you have saved up a significant amount, or have been approved for a business loan or did a successful crowdfunding campaign, it is essential to remember that you need to manage your business finances properly and wisely not just to keep the business afloat, but also flourish as it grows.

Leave a Comment