How to finance a business–What are your options?
You have a great business idea...
Now you need money to get it started. But where do you look?
Small businesses and entrepreneurs have lots of options when it comes to fundraising, and picking the right one can be quite a daunting task. And when 29% of small businesses fail due to lack of capital (Observer 2017), it’s really important to get it right.
That’s why we collected some of the most common options and described what they are–so you know how to finance a business in the best way.
The top ways to fund your business include:
Small business loan
Crowdfunding
Personal savings
Borrowing from family
Finding an investor
Some options will be better suited to your business than others, this will depend on the size of your business and what kind of industry you are getting into. For example: restaurants and manufacturers are going to need a larger sum of money to get started, as the cost of setting up is much higher compared to that of a personal trainer or a writer.
Small Business Loan
A small business loan is a way to get money, without sacrificing ownership of your business. It’s similar to a loan you might get for a car, or for a house, because you only pay back the amount you borrowed, plus any interest or fees.
There are many reasons why you would need a small business loan, from buying new equipment, upgrading your office to accommodate more employees, to running a marketing campaign.
To get a business loan, banks or lenders will look at both your personal, and business credit score to judge whether or not they’ll be able to get their money back.
As well as your credit scores, they will look into your (projected) numbers, how much money you are requesting, what it will be used for, and occasionally your business plan–to see what they might expect in the future.
Crowdfunding
Crowdfunding is a way for your business to raise a little bit of money, from a lot of different people. It’s usually done online, and there are a lot of platforms available to make a crowdfunding request.
It’s a way to raise money for your business, without going through a bank or needing a loan.
How does crowdfunding work?
Businesses use crowdfunding platforms to pitch their ideas. They let people know who they are, what they want to do, and what people can get in return for donating or investing in their business.
In your “pitch” you'll also need to include relevant information like how much money you want to raise, what you will use the money for and the timing of the project, from the investment phase through to the finished product.
Just as businesses use crowdfunding platforms to apply for funding, people look through crowdfunding platforms to find businesses and projects to support or invest in.
Often, they will get some kind of financial reward or incentive for investing in your business. This can come in many shapes and sizes, for example, limited edition merchandise, ownership in the business, or early access to your product or service. However, you can be as creative as you like when it comes to rewards.
The number of crowdfunding platforms increases year after year, and so does the amount that businesses are receiving. In 2017, 5.5 billion U.S dollars were earned through ‘donation and reward’ crowdfunding by business all over the world.
Whilst a lot of people are donating to businesses through crowdfunding, it’s often not recommended to base your whole funding initiative on crowdfunding alone, but rather use it to support funding in general.
Personal Savings
One of the easiest and most cost-effective ways to finance your business is to use your personal savings.
If you can do it, it’s great because it means that you don’t have to give up any ownership of your business, you’re not building up interest fees, and you don’t need to spend time applying, or justifying what you need the money for to anyone
However...
A lot of people can’t do it. Either they don’t have the amount of money needed to start their business, or they don't want to use it, either through fear of losing it or because it means they can’t use it for something else–like safety, or a kid's tuition for example.
In general, if you are using your personal savings to finance your business, it’s a good idea to always have some cash in the bank–for potential business, or personal problems that may unexpectedly come up.
Borrowing money from family to start a business
Borrowing money from family shares a lot of the same advantages and disadvantages of using your personal savings.
Family members, and friends will often be more lenient than outside-lenders, they probably won’t give you such a high-interest rate if any at all, and won’t want so much in return.
But again you have the same issues in terms of risk and personal stress–losing your money is one thing, losing the life-savings of your family members or friends is another thing altogether and can be hard to deal with.
One thing that is really important when borrowing from friends and family is to work out the exact amount of money that you need.
This helps you out in the long run as well, as it makes you think twice about what you need, and ensures that you have covered all of the options.
Why? Because you might find a cheaper alternative when the money is coming from a personal source, compared to when you borrow a larger amount of money from a bank or investor and have a less emotional connection to it.
Finding an Investor
Investors can be a great way to finance your business, and they often bring much more than just money to the table.
Investors can have a wealth of experience that you can learn from, as well as an extensive contact list that when paired with their money, can help your business grow even more.
When finding an investor, you have a couple of choices, for example:
Investment Companies
An investment company is a privately owned lending company. They are licensed and registered differently based on which country you are in, but are often a trusted source of investment.
They use their own funds and borrowed capital to help you start your business. Normally, you'll have access to a larger sum of money than if you were using your own savings or a crowdfunding campaign–but of course, they expect a certain return on their investment, either in terms of high-interest rates or shares in your business.
An added benefit of securing an investment from a reputable investment company is the image that comes along with it. It’s much easier and more comfortable for future investors to jump on board when someone else has already got the ball rolling.
Angel Investors
An angel investor is a wealthy individual who can help you start your business. They’re also referred to as business angels, private investors, informal investors, and a few other names.
Angel investors operate on similar terms as investment companies, in the sense that they provide capital for your business, and in return, they receive partial ownership of the business or charge you a high-interest rate for the amount that you borrow.
Unlike banks or other forms of investment, they are ready to invest quite early on–but this means that they are looking for a high return, often aiming to make 5 to 10 times more than their original investment.
Again, if you manage to secure a well-known angel investor, the chances that you'll be accepted by more investors increases too.
For some businesses, the hardest part about securing finance isn't finding an investor, but picking the right investor for their business. This varies a lot from industry to industry, but also from entrepreneur to entrepreneur–a personal relationship with a good investor can be invaluable when it comes to growing your business.
Business Credit Card
There are many reasons that you might consider getting a business credit card. For example, it helps you separate your personal finances from your business finances, which can save you a lot of time and stress when it comes to taxes.
Business credit cards also give you access to a higher credit limit compared to your personal credit card–which can be really useful when you have to pay the bills but are still waiting to receive a payment from your clients.
All the time that you spend using your business card, you'll be building your business credit score too–which means that if you need a larger amount of funding later on, you can obtain it more easily.
There are some things to watch out for too though:
Business cards come with higher interest rates than you'll be used to with your personal credit card.
And like many people’s experience with personal credit cards, there is a chance to overspend and rack up a large debt–which will, in turn, affect your personal credit score.
Now you know a little bit about how to finance a business–it’s time to go make it happen–and when you do, we’re here to help you accept card payments should you need it.
