Starting a small business is no easy task. It takes a lot of hard work, determination, and the right finance in a business to get it up and running. The wrong funding decision can have a huge impact on the success or failure of your business.
So how do you go about funding your small business? And are some options better than others?
This comprehensive guide will walk you through all the available options, explaining the pros and cons of each and some effective tips for securing the funds you need to start and grow your business.
1. Your Own Savings
If you have the money saved up, using your own personal savings is always the best option. That way, you don’t have to worry about repaying anyone or accruing interest. Using your own savings can be risky because you could potentially lose everything if your business fails but if you are confident in your idea, then it is a great choice.
If you decide to go down the self-funding route, it is important to choose the right business structure because this will affect your personal liability if things go wrong. Some of your options include a sole proprietorship, partnership, limited liability company (LLC), or corporation. For the least personal liability, you should choose to incorporate your business.
Pros of self-funding:
You can keep all the profits.
You have complete control over your business.
Cons of self-funding:
You could lose all your savings.
You might have to give up some equity in your business if you decide to take on partners later on.
2. A Loan from Friends or Family
Not everyone has the luxury of being able to finance their business entirely out of pocket. If that’s the case for you, don’t despair. There are still plenty of options available to you.
One avenue is to take out a loan from friends or family. This can be a great option because you usually won’t have to pay interest and you may be able to get more flexible repayment terms. However, it is important to remember that taking out a loan from friends or family can put a strain on your personal relationships if you are unable to repay the loan.
It is also important to draw up a legal contract that outlines the terms of the loan, including when and how you will repay the money. This will help to avoid any misunderstandings down the road.
Pros of a loan from friends or family:
You usually won’t have to pay interest.
You can often get more flexible repayment terms.
Cons of a loan from friends or family:
It can affect your personal relationships.
You will still be responsible for repaying the loan even if your business fails.
3. Small Business Loans
Another option is to take out a small business loan from a bank or other financial institution. Small business loans are typically available with low-interest rates and flexible repayment terms. This can be highly beneficial for startups because it gives them the time they need to get their business off the ground without accruing a lot of debt.
However, small business loans can be difficult to obtain because lenders will often require collateral, such as your personal home or other assets. They will also usually require a detailed business plan and financial projections.
Pros of small business loans:
Low-interest rates.
Flexible repayment terms.
Cons of small business loans:
You may have to put up collateral.
It can be difficult to obtain a loan.
You will need to have a detailed business plan and financial projections.
4. Venture Capitalist Funding
If you are looking for a large sum of money to invest in your business, venture capitalists may be an option to consider. Venture capitalists are typically willing to invest large sums of money in exchange for a percentage of ownership in your company. This funding route can help you to grow your business quickly, but it also comes with a certain amount of risk.
Venture capitalists will often want to have a say in how you run your business and they may push for you to grow too quickly, which can be difficult for a startup to handle.
Pros of venture capitalist funding:
You can receive a large amount of money.
It can help you to grow your business quickly.
Cons of venture capitalist funding:
The VC may want some level of control.
You may be pushed to grow too quickly.
5. Private Equity Funding
Another option for businesses that are looking for a large amount of money is private equity funding. Private equity firms typically invest millions of dollars in exchange for a minority stake in your company. Many small businesses have benefitted from private equity funding, as it has helped them to grow quickly and expand into new markets.
However, private equity firms will often want a say in how you run your business and they may also push you to expand beyond your limits. In addition, private equity firms typically have a lot of debt and this can be a risky proposition for small businesses.
Pros of private equity funding:
You can receive massive funding.
You can expand immediately.
Cons of private equity funding:
You may have to give up some operational control.
The rapid expansion can put huge pressure on a new business.
6. Angel Investor
An angel investor is an individual who invests their own money in businesses that they believe have the potential to be successful. Angel investors typically invest smaller sums of money than venture capitalists or private equity firms and will often leave you to run your business as you see fit.
The downside of angel investors is that they can be difficult to find and they may not always be willing to invest the amount of money that you need. To help secure the funding, it is important that you have a detailed business plan and that you are able to articulate your vision for the future of the company.
Pros of angel investors:
They invest their own money and acknowledge a certain level of risk.
You can often retain full control over your business.
Cons of angel investors:
They can be difficult to find.
They may not invest the amount of money that you need.
If you are inexperienced in business, it can be difficult to convince an angel investor to invest in your business.
7. Crowdfunding
Crowdfunding is a relatively new way of financing businesses. With crowdfunding, businesses can raise money by soliciting small donations from a large number of people. Crowdfunding can be a good option for businesses that are looking for a small amount of money and that are willing to give up a small percentage of ownership in their company. This funding route has led to the successful launch of many businesses in recent years including multi-million-pound companies such as Oculus Rift and Pebble.
The downside of crowdfunding is that it can be a slow process to raise the money you need and you may have to give up a larger percentage of ownership in your company than you would like.
Pros of crowdfunding:
You can get multiple small donations.
You can keep full control of your company.
You have ready-made customers who already believe in your product.
Cons of crowdfunding:
It can be a slow process to raise the money you need.
You may not get the full amount of money that you want.
There are many small businesses seeking funding and you may have to compete for attention.
8. Invoice Financing
If your business has customers who pay on invoices, you may be able to use invoice financing to fund your business. With invoice financing, businesses sell their invoices at a discount in exchange for a lump sum of cash. This can be a good option because it allows you to get paid immediately for work that you’ve already done.
However, invoice financing can be expensive and it is important to make sure that you are getting paid enough on your invoices to cover the cost of financing. In addition, if you have customers who regularly pay late, this may not be the best option for you.
Pros of invoice financing:
You can get paid immediately for completed work.
You don’t have to give up any equity in your business.
Cons of invoice financing:
It can be expensive.
You need to have customers who are willing and able to pay their invoices on time.
9. Government Grants
If your business is engaged in research and development, you may be able to secure government funding through grants. Government grants are typically awarded to businesses that are working on new and innovative projects. In the UK, there are a number of government-funded grant programmes such as the Small Business Research Initiative (SBRI) and the Technology Strategy Board (TSB).
However, the application process for a government grant can be lengthy and competitive. In addition, government grants typically come with a number of strings attached. For example, the government may require that you share your intellectual property rights with them or that you use their products and services.
Pros of government grants:
You don’t have to give up any equity in your business.
The money is typically awarded without having to repay it.
Cons of government grants:
The application process can be lengthy and competitive.
There may be strings attached to the grant money.
10. Business Credit Cards
Another option for financing your business is to use a business credit card. Business credit cards typically have low-interest rates and offer rewards such as cash back or points that can be redeemed for travel. There are various business credit cards available, so it’s important to compare the different offers to find the best one for your business.
However, it is important to be aware of the potential risks associated with using a business credit card. If you are not able to make your payments on time, you may be charged high-interest rates and late fees. In addition, if you max out your credit limit, this can hurt your personal credit score depending on how your credit card is set up.
Pros of business credit cards:
Low-interest rates.
Rewards such as cash back or travel points
Cons of business credit cards:
Fees or higher interest rates if you miss payments.
Potential damage to your personal credit score.
11. Lines of Credit
A line of credit is a type of loan that allows you to borrow money up to a certain limit. Lines of credit typically have low-interest rates and flexible repayment terms which means they are a good option for businesses that need access to cash flow. In addition, lines of credit can be used for a variety of purposes such as financing inventory or covering unexpected expenses.
However, lines of credit can be difficult to obtain if you have bad credit. In addition, if you are not able to make your payments on time, you may be charged high-interest rates and late fees.
Pros of lines of credit:
Flexible repayment terms.
Can be used for a variety of purposes.
Cons of lines of credit:
Difficult to obtain if you have bad credit.
Fees and high-interest rates if you miss payments.
12. Online Loans
If you’re looking for a quick and easy way to get funding, you may want to consider an online loan. Online loans are typically available with fast approval times and flexible repayment terms. Over the last few years, the number of online lenders has increased significantly, so it’s important to compare the different offers before you apply.
It is important to understand, however, that online loans can be expensive and they may not be available to all businesses. You also need to make sure that you are dealing with a reputable lender. There have been a number of cases where people have been scammed by lenders who promise quick and easy loans with no fees.
Pros of online loans:
Quick approval times.
Flexible repayment terms.
Cons of online loans:
Can be expensive.
May not be available to all businesses.
The potential for scams.
Final Thoughts
There are a variety of funding options available for small businesses, each with its own pros and cons. Carefully consider all of your options before making a decision because the right finance in a business can be the difference between success and failure. Whichever option you choose, be sure to do your research and only work with trustworthy people. With the right funding in place, your small business can thrive.
