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Starting a business can be an exciting time. You start with a great idea and you develop a rock solid plan. Then the time comes to fund your business. How will you do it? There are many ways to finance your small business and it is important to find the right method for you. Tom at Fired Up Millennial was kind enough to provide tips on ways to finance your small business.
How to Decide How to Finance Your Small Business
Funding a small business can be a maddening prospect. There are many ways to finance a business venture and they all have their own level of risk, reward, and potential. In addition, they’re all suited for different types of businesses and different stages of growth.
How can you know which method is best for your business, at the stage, it’s currently in?
Let’s take a look at your options.
Small Business Loans
Getting a small business loan is one of the more common ways to fund a business venture. Many banks and other types of lenders offer some kind of loan product geared toward business owners, and while taking your business into debt might sound like a scary prospect, there are times when it’s a solid move.
If your business is doing well and is ready to expand into a second physical location, for instance, a small business loan might be the perfect way to jumpstart that new stage.
Seasonal businesses that need to buy a large amount of inventory before their busy season can also benefit from a small business loan, as would ventures that need to upgrade equipment. In short, loans are excellent choices for small businesses that are doing well and simply don’t have the cash to push their business to that next level.
Because a small business loan is still often a secured credit product, however, owners should think long and hard before getting one. If there is a financial setback, you could find yourself unable to make the loan payments—and that’s a frightening position for you and your business to be in.
Also, keep in mind that a bank or lending company doesn’t care what the profit potential of your business is, or how much you’ll be making down the road. They only care if you can make the payments on the loan you want now. If you’re hoping to get a loan based on your 5-year business plan, think again—and check out some of your other financing options.
Raising Money from Investors
You could raise money from a variety of investor types. Angel investors, family members, and even friends could be a source of funding for your business if you’re just starting out.
There are also investor cooperatives where you can put out a general pitch and various investors can decide whether to fund your business.
Getting friends and family to fund your efforts can be a good informal way to finance your ideas, but also comes with its own potential issues.
Investors will be looking for an exit; they want to know when their money will no longer be needed—and how much of a return they may be able to expect. Eventually, they’ll want to take their money back out, and make a profit; it’s your job to offer them a way to do that if you expect them to invest in your company.
Even if you’re just getting funding from your closest relatives or friends, make sure there’s a contract in place that outlines exactly what each party is responsible for. Some investors, for instance, may want more control in your company than you’re willing to give; take time to draw up terms all parties can agree on.
Invoice factoring is an interesting way to turn your unpaid invoices into fast cash that you can infuse your business with now, instead of waiting to get paid. Perhaps you sold a large order to a customer, who will pay you in 30-45 days, but you need the money now in order to replenish the inventory you just sold.
You could sell that unpaid invoice to a factoring company, who will loan you the money you need and then go collect the invoice from your customer in order to pay themselves back. It’s a great option—if you’re willing to pay the factoring fee, usually between 1% and 5%.
While invoice factoring can be a good way to carry your business through a short-term cash shortfall, it can also be a good way to alienate customers if the factoring company you use is less than ethical in dealing with them. Keep in mind that they will be collecting the customer’s invoice directly, so if you see any indications that they won’t treat your customers as well as you do, walk away.
Grants are money given away by a corporation, government agencies, or non-profits, and they can be excellent ways to fund a business if you’re willing to abide by the rules of the individual program. With grants, you need to find a program you qualify for, submit the application according to that program’s requirements, and report back about how you spent the money.
There are thousands of different grants available, and with a little research, you can find one your business qualifies for. The application process can be convoluted and time-consuming, but if you aren’t in a hurry, or have an innovative idea, a grant may be the perfect funding solution.
Technology has changed how we do just about everything, and funding a business is no exception. One of the options available now to business owners is called crowdfunding—literally asking people on the internet to help fund your idea.
With crowdfunding, instead of getting a few investors to kick in large amounts of money, you ask thousands or even millions of people for much smaller amounts. In some cases, even single-digit amounts are sought after and encouraged; the quantity of donations is even more important than the quality—because they all add up.
The drawbacks to crowdfunding include a time factor; it takes a lot longer to raise needed capital if each investor is only putting in $20.
There are many different ways to fund your business, and each method comes with its own perks and downsides. Before choosing a method, look at the stage of your business and what each method could cost you.
If you choose the wrong one, you might be taking on debt you can’t pay back. Choosing the right one, however, could result in amazing success for your venture.
Tom is a millennial relentlessly pursuing his dream of financial independence and early retirement so he can travel the world and enjoy life without being limited by money. Follow Tom on Twitter @FIREdUpMillenn to see his latest posts and tips.