Business Financing Options
The success of your business is dependent on the time and effort that has been invested by you—however, funding is also a critical factor which allows you to provide the fuel for your business.
The following are some financing options available to start-ups and small-to-mid size businesses:
Obtain the finances from your personal savings to give you more control and ownership in the business and a stronger incentive to ensure that your business will succeed.
You will have the flexibility and freedom to operate your business as you choose since you will not be restricted to any form of constraints if financing were received from a third party.
Friends and family
Friends and family can be a credible option when looking for an alternative form of business funding. Some of the perks include no or minimal interest rate and no impact or check on credit history. Especially when you are in the initial stages of your business and when funding options are very limited, friends and family will be there to entertain your requests.
The first thing that comes to mind when trying to get financing is a loan/line of credit from a financial institution. The repayment is done according to schedule and interest rate quoted. Approval for a demand or term loan is based on the business’ credit history, number of years that it has been in operation, type of business and a formal set of financial statements. A majority of the time, businesses are required to provide a general security agreement of the company’s assets and personal guarantee from the owner. If there is a default on the payments, the institution can seize and/or sell the asset to pay the balance outstanding.
A lot of times, businesses will choose to lease equipment rather than buy it. Leasing allows your company to keep cash flow for other financial needs. They require a lower down payment in comparison to a loan obtained to purchase equipment outright. Factors that can affect the interest rate include the life of the asset and/or the credit rating of your business.
Also known as angels or informal investors, they are philanthropic funders who provide start-up capital in exchange for equity or convertible debt along with providing wisdom and valuable guidance throughout the start-up process. This type of funding is usually applicable to those who are in the early stages of their business. Angels are usually preferred as their investing their time and money on the individual rather than the feasibility of their business. Angels do not expect a significant return from their investment.
Grants are free money to businesses from the government. It is provided to those that qualify based on the application process. Grants are usually targeted to specific sectors, for instance, if you are conducting research and development in your business, the largest federal support known for this activity is Scientific Research and Experimental Development (SR&ED). Grants are designed to encourage growth of a business without having large amounts of debt.
Factoring is a business transaction where you have the ability to receive a cash advance by selling your accounts receivable to third party. There are fees associated with this form of transaction and you will receive a range from 70 – 85% of the balance owing to you by your customers. This allows you to get the capital you need without waiting until your customers make their payments.
A stakeholder who provides funding to start-ups or support small businesses who wish to expand, however the funding option is limited. They are willing to invest large amounts of cash given that the business has high growth potential. Since the risk they are taking on is significant, VCs have a higher influence in the decision making process. Their objective is to reap from their investment in the business within 3 years.
This is an online platform that assists a borrower to access small amounts of loans donated by a large number of individual investors to finance a new venture—anyone has the ability to become a lender. Transactions are conducted through crowdfunding sites which work concurrently through social media websites i.e. LinkedIn, Facebook and Twitter. Crowdfunding campaigns, like many fundraising campaigns, allow you to market your idea and convince individuals to contribute to reach your targeted figure.