If you are a small business or startup looking for funding, there are plenty of options out there, but there’s more to choosing the best financing offer for your business than just picking the lowest interest rate.
There are many factors you need to consider before accepting a proposal.
With that in mind, here are five ways to fund a small business, as well as some pros and cons of using each method.
One of the most common funding strategies founders can use to fund a small business is with personal savings.
If you have the money, this can be a great strategy. It doesn’t leave you beholden to any other creditors, and you don’t have to worry about paying interest on the funds.
What’s more, with interest rates where they are today, if your business is a success, you might earn a higher return on this capital than you would keeping it in a savings account with a low rate of interest.
One downside of using this strategy is that you might not be able to cover unexpected personal expenses if you’ve pumped all of your savings into your small business. That’s something to keep in mind when using your savings as a funding source
Another common strategy used by small business owners is to borrow money from family.
Family members and relatives will probably demand a lower interest rate than other funding options. They are also less likely to call in the loan if the business runs into problems.
However, there are always going to be risks of mixing money with family. If the business does not work out, it is always going to be harder telling loved ones their investment has failed, than it would be a third party.
So, it is worth taking some time to consider the pros and cons of family funding before accepting any money.
Unsecured business line of credit
A line of credit can be a great source of funding for companies with fluctuating income.
Lines of credit provide quick, flexible funding for companies once approved, and can often be cheaper than other short-term sources of financing. Most major banks also only charge interest on the amount you draw, and some banks even offered tailored packages for growing businesses.
The downside of using lines of credit as a funding source is that they can become quite costly if used as a long-term source of finance.
Moreover, banks can withdraw facilities at short notice if they become worried about a business’s credit profile.
Crowdfunding websites like Kickstarter have also become a popular way to fund small businesses in the past few years.
This strategy isn’t entirely cost-free. Most campaigns offer supporters gifts in return for contributions. You will also need to promote your campaign, which means spending money and time on promotional efforts. These can range from low effort activities such as spreading the word on social media, to higher cost and higher effort activities such as leafleting and networking in business groups.
The crowdfunding site will also take a proportion of the funds raised as a fee.
The quirks of using crowdfunding to fund a business suggest that this strategy might only be suitable for certain types of enterprise.
Persuading other private investors to buy a piece of your business, is another popular funding strategy.
Enlisting the help of angel investors, private equity investors, or business connections can provide experience as well as funding.
You might also be able to drum up a few valuable business partnerships along the way.
However, professional investors will likely expect detailed accounting of the company’s financials and a business plan for the future. It could also be sensible to draw up a contract between parties, stating the legal obligations of the investor and investee. This could add additional cost and complexity to any deal.
Also, it is essential to remember that if you sell a portion of your business, depending on how much you have sold, you might lose control if the third party becomes dissatisfied with your management style.