When we are talking financing a small business, we are potentially looking at a handful of slightly different situations. For instance, a startup needs the initial capital; a business already on the rail needs the money to see itself through the lean period; and, even if you own a business that has started to generate what we may call decent revenues, you will still need money for research and development and for expanding your scope. In this article, as we put down the best ways to fund your small business, we will also touch on these aspects and discuss what options might be the most suitable for you depending on the situation your business is in at current. As always, we recommend that you get the help from a business financial advisor to give you the right advice.
1. Traditional Lending Platforms (Small Business Loans, Friends & Family)
This applies mainly to startups, of course. Small business loan can be a good idea when you need a considerable amount of capital to get started; and when you cannot secure any partial funding (be it through savings or any other avenue) toward that capital. This way you can secure funding at relatively low interest, although the downside is that you may have to end up borrowing more money than you need. According to a Forbes article, you have a better chance of securing this type of loan when you apply to a community lender platform or a credit union instead of a big, centralized bank. The approval rate with the latter for this type of loan is 17%, whereas with the former, it stands at around the 50% mark.
Alternatively, you may also consider borrowing from any member from your close circle of family and friends—someone who has enough trust and confidence in you and is willing to lend/risk his money. However, if you go this route, make sure to get everything down in writing: how much money you are borrowing and what for, whether it is a secured or an unsecured loan, and when you intend to pay the money back and with a fair interest rate that is compatible with current market value. A written loan agreement of this type secures both you and your lender from any potential complications that may or may not arise in the future.
2. Angel Investors
If it’s not a huge amount of money you are asking for (especially if you are a startup), angel investors may often come to your rescue. An angel investor, who is often an experienced entrepreneur himself, lends you the money you need in exchange of receiving equity in your business. An additional benefit of having an angel investor on board is that with all his years of experience, he can provide valuable guidance to help expand your business.
However, angel investors normally invest in enterprises which have already started to generate revenues and show potential for further growth. However, if your pitch is strong, or what’s more, if you have a clear value proposition, you may well count on even more than one angel investor willing to lend you money.
Crowdfunding platforms such as Indiegogo and Kickstarter are specifically designed for starters and are a viable option for budding entrepreneurs. The idea is simple: you pitch your proposal there, and directly solicit funding from common people in exchange of any reward you are willing to offer them. The catch is that unless you have an exciting enough story to sell, it is difficult to raise money this way. Also these platforms charge a steep rate for their service, often as high as 10% of the total money raised. In some cases, however, you get to retain the money raised even if it fails to meet your declared goal. In case of others, if you fail, you fail for good!
4. Peer-to-Peer Lending
P2P lending might not be the best solution if you are looking to secure startup costs. P2P lenders are simply investors who are looking to diversify their investment portfolio and generate income in the form of interest. So understandably, they will not be too keen on investing money on a startup which may have as good a chance of succeeding as falling on its face! However, if your small business is already generating fair revenues—ideally on the upwards of $75,000 annually—and you are looking for money to expand your scope, this is a good opportunity. The loans get approved and funded in quick time and you won’t be maxing out your credit card!
5. HELOCs, Savings, and Personal Assets
This, of course, is the easiest way to raise money and as you will be providing some of your personal assets (be it your home, car, IRAs) as collateral, the interest rates will be lower, too. And yes, you CAN use a home equity line of credit to fund your business—there are no restrictions that say you cannot. But then again, this also is the riskiest proposition when you are putting your home or retirement savings on the line. But if you have no option and if you happen to have enough confidence on your business idea, you may as well try this route.
So, based on our research, these are the Top 5 Ways to Finance A Small Business. But as we have already said, it depends on your own distinctive situation as to which route(s) you will take. So, consider carefully before you reach your decision.