By 
Start-up financing generally falls into two categories: debt (borrowed capital requiring repayment with interest) and equity (selling a stake in your business). The seven most effective sources of funding for your business are bootstrapping, friends & family, angel investors, venture capital, business loans, crowdfunding, and grants.
Main Categories of Business Funding
When you start exploring funding options for your business the choices can feel overwhelming. Should you go with your local bank or work with someone with deep pockets who is looking for the “next big thing”?
Regardless of the specific source funding generally falls into one of three categories:
Debt
When you take on debt, usually in the form of a loan, you must pay back the borrowed money in the future with interest. Depending on your creditworthiness, the state of your business, and the borrowing terms, you may need collateral (like your home or savings account) to secure the loan. Well-established companies with a strong credit history are more likely to qualify for unsecured loans that don’t require collateral.
Equity
In equity arrangements, investors provide business owners cash to start or grow their companies, with the understanding that they’ll get something in return. This may be a percentage of the profits or future value of the company known as business equity. Equity is the difference between your company’s assets and liabilities or the amount of money you can potentially return to investors after you pay your debts and liquidate your assets.
Many businesses rely on a combination of funding sources for capital, especially when they need a significant influx of cash to cover startup expenses or reach their expansion goals.
Grants
Grants offer business funding that you don’t have to repay. However, they aren’t always easy to come by, and the eligibility and selection criteria are typically stringent.
The first step in securing financing for your business is to develop a solid business plan and determine how much capital you need. Most funding sources require evidence that your company will make enough money to repay what you borrow or make their investment worthwhile.
Once you have a plan, you can begin researching and comparing funding options to identify those that best suit your needs. The following overview can help you get started.
1. Bank loan
Many entrepreneurs start their funding efforts at their local bank. Well-established businesses with good credit histories tend to be most successful in securing traditional business loans, but some lending institutions offer products specifically for startups, small businesses, and new business owners.
You can generally access more money at a lower interest rate when you have an established relationship with the institution. Bank loans also typically have predictable fixed monthly payments. As you make payments, you build a positive credit history that can position you for lower interest rates, trade lines of credit, and additional financing in the future.
On the downside, most banks have strict eligibility criteria for business loans, and you can expect a lengthy application and approval process. Borrowing at the lowest interest rate often requires collateral to reduce the bank’s risk, but this increases your risk if you cannot repay the loan. Some banks may offer business financing without collateral, but you can expect to pay more in fees and interest for that privilege.
2. SBA loan
The U.S. Small Business Administration is a federal agency that supports small businesses with expertise and funding to help them start and grow. The agency provides capital via SBA loans, which are partially government-backed loans from participating lenders. They typically have lower interest rates and require smaller down payments than other funding sources.
You can apply for an SBA loan for almost any purpose, from operating capital to large real estate and equipment purchases. If you have a small business, the favorable terms, including a more extended repayment period for smaller monthly payments, could make an SBA loan an affordable solution.
However, accessing this funding isn’t always easy. The SBA maintains strict lending standards, and the partner banks may consider your business and personal credit scores. Although the qualification process is somewhat easier than applying for a bank loan, you can still plan on extensive paperwork and a mountain of red tape to get funding.
3. Line of credit
If your company has an established relationship with a bank, it may qualify for a line of credit. This can be an ideal solution when your cash flow needs fluctuate, and you need a short-term influx of cash.
A line of credit is more like a credit card than a loan. It allows you to borrow up to a pre-set amount at a predetermined interest rate, which may be significantly higher than a business loan or credit card. However, you only have to pay interest on the money you use from the line of credit, and once you repay the withdrawal, that money is again ready for you to use.
Read Also: Leveraging Your Business with Other People’s Money
Managing a line of credit can help your company build a positive credit history, which puts you in a position for more favorable financing in the future. It’s a good solution for short-term cash flow issues, but relying on it too heavily can create a debt cycle that reduces your company’s overall equity.
4. Grants
Grants are free money that you don’t have to repay. Federal, state, and government agencies, nonprofit organizations, and corporations provide thousands of dollars yearly to business owners for help starting, growing, and expanding their businesses.
Grant programs generally have strict eligibility requirements based on annual sales, number of employees, industry, and how long you’ve been in business, or demographic factors, like being woman-, minority-, or veteran-owned. Some programs also favor small businesses focusing on creating social impact or finding innovative solutions to social issues.
5. Bootstrapping
If you don’t qualify for a business loan or grant and can’t find investment opportunities, bootstrapping may be the best (or only) solution for business funding. It’s possible to fund your business by tapping into your savings, asking friends and family for help, using personal credit cards, downsizing your lifestyle, and side hustles. This approach requires hard work and sacrifice, but the payoff is a business you build from the ground up with minimal debt or outside influence.
6. Crowdfunding
If you have an innovative business idea with a compelling story and irresistible product, crowdsourcing might be a viable financing solution. You’ll have to make a solid pitch to potential backers on a crowdsourcing platform, but if you can manage that, you can secure financial backing and a ready-made audience for your product or service.
The drawback to crowdfunding is the possibility that you won’t have any success, and even when you do, the platform fees diminish returns.
7. Equity investors
Securing investors for your business can mean access to a significant amount of capital, along with high-powered industry connections and mentors. Most investors only back companies they feel strongly about and expect a significant return on their investment.
Small businesses and startups tend to be the most successful among venture capitalists and angel investors. These investors typically require a minority stake in the business and want to be involved early on. More established companies with significant growth potential often have more success with private equity. Private equity investors typically make the investment with an exit strategy in mind and will sell their stake in your company for a profit when their investment reaches the predetermined goals.
While working with investors will get your company established and moving forward, this funding route requires relinquishing some control over your business. You may have to contend with extra pressure from investors who demand results while giving up a potentially substantial amount of equity in your company.
Comments