It’s not enough to have some of the best business ideas. Without financing options, your business will die even before it gets started. Raising funds to start a business can sometimes be a challenge and an obstacle to commencing and implementing those ideas.
To begin with, you must determine how much money you need to start or expand your business before you can begin to source for it.
What is Business Financing?
Business financing is the different types of funding which you can use to start and expand your business.
Business funding includes short-term and long-term financing. You must pay short-term financing option in a short period, i.e less than one year. While you should repay long-term financing for over one year. Long-term financing is used for expensive business assets like equipment and real estate. There are, of course, many in between.
With business funding, your small business might get the boost it needs to succeed, and sometimes survive.
10 Financing options for small businesses
There are several factors that will determine which business funding is ideal for you. Some of the factors include the level of your business, the purpose and the repayment period. The following are ten popular business funding options you can consider:
1. Personal savings
Personal savings is the most popular source of funding for most small businesses. It includes any inheritance or personal funds made or savings from past jobs.
The amount of money that is available as your personal savings is determined by factors such as your income (salary and other side-hustle), lifestyle and taxation. This form of funding is typically interest-free and carries no risk for your business.
2. Friends and family members
Funding from friends and family members is the second most popular financing option after your personal savings. This is the cash that rich family members or friends give you. The benefit of this funding option is that you can get help from relatives and friends without worrying about quick payments.
In most cases, they might not even ask for the money again, or some might tell you not to refund. This is the best way to get a loan without collateral
3. Bank loans
Banks are a major loan option for small businesses, with overdraft and term loans as the most popular loan options available to both new and existing businesses.
The issue with this kind of funding is that banks typically demand collateral and charge hefty interest rates.
All entrepreneurs will apply for a bank loan at some point throughout their business careers. However, it is better to use bank loans to purchase business assets rather than using them as operational expenses.
A partnership is a legal form of business organization where two or more like-minded people jointly manage and share the risks and rewards of an enterprise.
Running your business as a sole proprietor, there will be cases of insufficient funding which will limit the level of expansion you want. But if you decide to bring in a partner who will also contribute funds, then there would be enough money to expand the business.
To start a partnership, the partners will come together to draft a “Deed of Partnership“. This document shows the rules and regulations governing the business, such as the share of profits and loss, capital contributions of each partner, roles of each partner in the business, etc.
In a situation where there is no partnership deed, the partners will share profit and loss equally.
There are two types of partnerships: general partnership and limited partnership. In general partnership, all partners are responsible for the liabilities of the business in the case of liquidation. Their liabilities are unlimited. While in a limited partnership, the partners are only liable for their financial contributions to the business.
5. Money Lenders
Money lenders are another loan option for small businesses.
They are people or a group of people (as opposed to banks and other financial institutions) who provide small personal loans at high interest rates.
Bank lenders often give unsecured loans (loans without collateral) but they have unfriendly interest rates. Ensure that you properly read the terms and conditions binding the contract before accepting a loan offer from them.
Some loan providers have risky but enticing terms. Their contracts are also written so that if you don’t meet up with the terms of payments, you could lose your business.
6. Angel investors
Angel investors, sometimes known as equity investors, are wealthy people who provide capital for new businesses. They are drawn to companies with strong growth prospects. You must give the angel investors a portion of the ownership and management of your business.
Their investment in the company will determine their ownership in the business. The company still belongs to you. However, you must be careful so as to avoid being pushed aside. This often happens in a situation where the angel investor has enough money and his capital is bigger than yours.
If you want to leave the company quickly, you can still give the angel investor a bigger ownership stake. Even though they own the majority of the company, some angel investors might want you to continue managing the business since you own the idea and still have the passion.
You access this type of funding only if you have regularly established a strong reputation in your industry. Your customers can be a financing option for your business by paying in advance for goods that they ordered.
Alternatively, you can encourage your customers to make cash payment for purchases instead of buying on credit. Giving consumers who pay early discounts on their purchases is another way to make money.
8. Trade credit
You can negotiate with your suppliers for payments of supplies to be made in future. This makes it possible for you to use the proceeds from the sales of goods to settle your debts without borrowing.
The success of trade credits depends on your reputation and the supplier’s willingness to part with his goods for a few weeks before you make a payment.
Keep in mind that suppliers who give you trade discounts will also increase the prices of the products, since you are not making payments instantly.
With this funding option, you solicit online contributions from the public to sponsor your entire project. Peer-to-peer lending is one option, or people might invest in your company by purchasing shares or stock.
It is best suited for companies with strong development potential, lots of media attention, and plenty of time, because it can take some time before you get all the funds that you need.
Grants are non-repayable sums of money given to a deserving recipient (grantee) by the government or a private foundation (grant-makers). Some grants are frequently highly competitive, but if your business has a significant social impact and helps not only you but the entire community, you may be able to get funding.
Grants may not always take the form of cash; they could also take the shape of a fixed asset. For instance, the property where the factory or business will be built or the machinery.
You should keep in mind that when the economic environment changes, the viability of different funding options may change over time.
You need different funding options to meet the capital needs of your company at various stages (growth conditions) and states. These financing options all have their own regulations and procedures, but they are also very similar in many ways. Making the decision that best fits your company’s financial needs is crucial for its success.
Before looking for funding, it is advised that you, as an entrepreneur, first evaluate how much money your business actually needs. This is to prevent borrowing more or less money than you actually need, as both scenarios are bad for your company.