A beginner’s guide to funding a small business
So, you have a business idea you want to get off the ground, but how do you secure capital to start it? To create and start a business, you must consider a physical location (if applicable), marketing, employees, products, and more. All of these costs can add up to hundreds of thousands of dollars. There are many ways to secure financing for a business of any size, including a small business. Let’s dive into what your options are.
No debt financing
As the name implies, zero-debt financing does not involve a business or individual going into debt to receive money. While no-debt funds are rarer, they aren’t entirely uncommon.
Savings
Many entrepreneurs pull money from their savings to utilize business capital. If you can save up a large amount of cash, this is an ideal way to fund anything, as you do not go into debt and do not owe anyone equity. However, it takes a while for most people to secure a large amount of cash for savings, so it may not be the most feasible if you want to act fast.
Early investors
Early investors fund your business before it becomes a reality, and they typically come in the form of friends or family. They give up some of their savings to help your business get off the ground and usually don’t expect anything in return. Depending on how much money friends and family give you, it can secure your entire business’s startup costs without any debt!
Equity shares
Another way to secure financing without traditional debt is to give up equity shares. In exchange for a percentage or partnership in your business, you receive financial aid to help fund your business’s startup. However, giving up equity is a significant business decision and shouldn’t be taken lightly. Investors looking for business equity are pretty standard. Angel investors typically have a high net worth and provide large amounts of cash in exchange for a percentage of the business. Venture capitalists pay their way to become partners in promising businesses and usually help actively manage the company.
Grants
While startup grants aren’t as common, they aren’t entirely rare. A grant is essentially free money given to someone with no strings attached. Grants are commonly given to college students, first-time homebuyers, and even small business startups. Grant availability varies depending on location and business type.
Crowdfunding
Crowdfunding involves pitching a business to a group of people (typically online audiences) in exchange for help funding it. Some crowdfunding campaigns offer investors first dibs on a business’s product or service. Some funders receive a small equity percentage. Others do it for free. In many cases, it can be challenging to secure crowdfunding for startups, as it requires marketing skills and gathering outside interest.
Debt financing
Debt financing involves receiving money that requires repayment in the future. Debt financing comes in many forms, such as credit cards or loans.
Business loans
Business loans are lump sums of money given to an entrepreneur or business startup upfront. In return, businesses must repay this loan slowly over a fixed period with interest. Banks or lending companies typically issue loans, but they can even be given by friends or family who eventually want their money back. Loans require credit checks and proof of income; securing one may be challenging for those with financial issues.
Lines of credit
Lines of credit are similar to business loans, but instead of receiving a large sum of cash, you have access to a fixed amount of money that you can use as little or as much as you’d like. However, you must still pay it back, and interest fees will apply. Credit cards are the most common example of a line of credit. Some credit cards offer introductory interest-free periods; if a business can pay off its debt within this period, they are not charged interest.
Factoring
When your business has gotten off the ground, many companies will issue client invoices, which can take months to receive funds for. Small business factoring involves getting an immediate cash flow from invoices in exchange for selling them to a finance company, typically a business working capital company. Factoring is technically short-term debt, as your business owes the factoring company until the invoices are paid. Your business will usually be charged a small percentage of the invoice cost as a fee. Factoring is a decent option for businesses that need cash flow much quicker than their clients pay invoices, as long as they don’t mind paying fees.
Conclusion
Small businesses are typically funded through credit lines, loans, and other debt. However, some companies can receive funds from family, early investors, startup grants, and more that do not cause a business to have debt. Exploring your options before deciding on a funding method to determine what will work best for you and your small business is essential.
