Small businesses typically require capital to grow. This money might come from a variety of sources. Before requesting money, you should have a solid company strategy and a clear plan for how you intend to use the funds.
You must also explain how you intend to repay the loan and why your firm is a suitable investment for investors. You may have a great idea, but investors will want to learn about the company’s management to trust the business plan and the people behind it.
How do you choose the best funding sources for your company’s growth? Here are seven funding options and what you should think about for each.
- The first financial source to consider is yourself. Can you use your money to start your own business and maintain 100% of the earnings and ownership? That isn’t always possible, and you’ll have to go elsewhere.
Friends and family loans
- Friends and family members may occasionally lend loans. If they lose money on the investment, this technique may backfire. However, if the business is booming, a stronger connection may be formed.
- Credit cards are normally the simplest way to obtain funds, but they come at a significant cost to the capital because credit card interest rates are often high. “The good news is that they’re adaptable,” says small-business expert Rachel Alexander. “You don’t have to defend why you’re spending the money.”
- The amount you can acquire is determined by your credit limit, which is likely to be smaller than what you’d get from a bank or other loan type. Credit cards are an excellent source of finance for small-scale revolving demands as well as for entrepreneurs who wish to keep ownership and management of their business.
- In recent years, online crowdfunding platforms have gained in popularity. They are frequently used to aid businesses in acquiring funding to launch a new product. Crowdfunding may be time-consuming and requires the publication of content on the site, which typically includes a video or images of the items.
- Crowdfunding may be a terrific way to pre-sell your products and raise finance for their development, but you may spend a lot of the money on incentives to attract people to sign up. Some crowdfunding services may only allow you to access the funds if you reach your fundraising goal, and the site may take a part of your revenue.
- Obtaining a bank loan or line of credit, according to Alexander, may take longer than using a credit card. You must have a track record of debt repayment when you present your case to the bank. The bank will require a business plan and financial forecast.
- “It’s understandable that the bank wants to ensure they’ll be paid back,” Alexander adds. Banks provide a variety of lending products, including some through the Small Business Administration. Some loans require collateral in the event that you fail to repay your obligation.
- Angel investors are wealthy individuals who obtain an equity share in exchange for money. They want to make money and usually have business skills that they can share with you to help your company thrive. Angel investors, according to Alexander, will assess your company plan and require you to build a case for why they should invest, which isn’t necessarily a bad thing. Entrepreneurs should be evaluated to ensure that their business concept is sound.
- Venture capitalists,
- like angel investors, take shares in your company in exchange for financing. Venture capital funds, like mutual funds, aggregate money from various investors. Venture capitalists will also be involved in the day-to-day operations of the businesses in which they invest. You will give up some control and equity in return for potentially significant sums of money.
Consider how much money you require and what you are ready to give up in return for funding. This will assist you in determining the best strategy to use in getting financing to build your firm.