There are more options for financing your business than the standard practices of begging for a business loan from the local bank, asking family members to lend you money or charging your purchases on a credit card. While there are a number of options, each has their pros and cons. The hard part is determining which method of financing the business is right for you. So, what are the best options for financing your business?
Bootstrapping is the practice of funding your own business. The simplest method is using your own savings to fund your business. Some sell property to raise capital. They might funnel money from their day job into their business. You could try to pre-sell products to fund the manufacturing of the first lot. This method allows you to avoid debt or giving up ownership of your company. However, it is hard to do and may not allow you to raise a lot of capital.
Sometimes people borrow against their property to raise money for their business. For example, you might take out a line of credit to fund your business. It could be a home equity line of credit secured by your primary residence or a line of credit secured by your business office. You could also buy equipment on credit secured by the equipment itself.
The line of credit doesn’t require payments until you borrow against it. Once you borrow against the line of credit, you have to start paying it back. As you make payments (interest and principal), the payments and the balance will decline. The biggest benefit of this is that it has a relatively low-interest rate.
Small Business Loans
Small business loans are the standard route for raising money for your business. Most people seek a business loan from their local bank. The downside is that you are likely to be rejected. Small businesses without credit history or assets are the least likely to be approved. What if you have an established small business? In this case, a small business term loan could be a better option. Term loan rates are something you can negotiate, and you can shop around for a better rate. Always understand the loan terms and your payment commitment before you sign it.
Angel investors are investors who put their own money into early-stage businesses and small businesses. They hope for significant returns when the business succeeds. This approach requires giving up some equity. Yet you’re gaining access to someone who may bring invaluable contacts and experience. Always seek legal assistance before you commit to an angel investor because they may require large loan payments that can cripple your cash flow. Or they may expect you to sell the business or their share of it to recoup their investment. A stable small business that doesn’t want to grow much or get bought out shouldn’t bother with an angel investor.
Crowdfunding is an increasingly popular financing method. You are asking the crowd of many small investors online to loan you money. You could also use it to pre-sell products to a large community that become invaluable word of mouth marketers for your brand. However, the crowdfunding model lacks some of the standard consumer and business legal protections. Your intellectual property could be stolen by someone following you in product development, and it is hard to do much about it.
If you are seeking financing to expand or fund your business, there are ever more options for financing it. Understand the pros and cons of each option so that you can choose the right one for your business.