10 Ways to Finance Your Small Business
During the life of a business, the owner will need external funding for growth and to keep it going in adverse circumstances. Raising money can be challenging, whether you are looking for start-up funds or capital for business expansion. Here are 10 sources of equity and debt funding you should explore to raise money for your business.
1. Small business lenders
Many lenders are interested in offering business loans to small businesses. These loans are common financial instruments for funding small businesses and can be used to start or expand a business. You can shop around for a business loan online and compare the rates offered by multiple lenders. Generally, these loans are secured by assets, and rates may be high.
2. SBA (Small Business Administration) loans
SBA loans are federally guaranteed small business term loans designed for businesses that may not otherwise qualify for traditional loans. SBA-backed loans are provided by traditional lenders and range from $50,000 to $250,000, with interest rate typically starting from 7% for the duration of 7 to 10 years. You can approach your local bank to find out if it offers SBA loans.
Read More: SBA Business Loan and how to apply?
Traditional banks provide business loans for small businesses. Interest rates applicable on a bank loan are lower than that on credit cards – currently between 6% and 25%, depending on your credit score. However, banks check a track record of your business and usually demand the loan be secured with assets. J.P. Morgan Chase and Bank of America allocate additional funds for small business lending.
Bootstrapping refers to the process of using existing resources for the growth of a company. As the business grows, it can maximize its financial resources for further growth. Critical advantages of bootstrapping include complete control of the organization without external influence, no need to outlay cash to repay a loan, smart spending habits.
5. Borrowing against your home
If you have a property like your own home, you can get home equity lines of credit (HELOCs) and home equity loans (HELs). With a home equity loan, you can get a fixed loan amount for defined repayment tenure with fixed or variable interest rates. With home equity lines of credit, you can apply for a specified sum as needed and pay interest only on the amount used.
6. Friends and family
If your credit score is not good enough to get a loan from banks and you can’t raise funds from elsewhere, turn to the people you share a good relationship with. They will ignore your credit score or current account balance to lend you money for your business. Moreover, they will not demand high-interest rates, and in fact, you won’t be required to pay interest to your family members. However, borrowing from family and friends comes with its own set of risks. If God forbid, the venture fails, or you can’t repay on time, your relationship can take a beating.
7. Angel investors
If you have run out of other options, you can always turn to affluent individuals willing to invest in your business. Some well-off individuals like to take risks and pool research, often in exchange for an equity stake in the business. Typically, angel investors have achieved success in a particular industry and look for new opportunities. Not only can they invest in your venture, but they offer you guidance based on their own experience and use their connections within the industry to help you grow.
8. Venture capital
Venture capital firms provide early funding for fledging companies in exchange for equity stakes in the business. However, venture capital firms typically invest in businesses that demonstrate high potential to generate profits with the hope of cashing out their stake.
You can use the internet to reach out to thousands of potential investors. However, some crowdfunding platforms hold the funds accumulated until the specified business goals are met. If the goals are not met, the funds may be sent back to the donors.
10. Peer-to-peer loans
If you have bad credit and can’t raise money from traditional lenders, applying for peer-to-peer loans (commonly known as P2P loans) can be a viable option. Under P2P lending, a borrower requests for a loan through online platforms, such as Lending Club or Prosper. Retail investors review the request and assess the financial details provided by borrowers. After receiving the funds, the borrower pays back the loan with interest through monthly payments to the P2P platform, which returns the money to the investors based on their contribution. Renowned venture capitalists fund leading P2P lenders like LendingClub and Prosper.