Businesses are vastly different from one to another; however, the people behind each and every one of these businesses have at least one thing in common – they had to find a way to financially fund their business.
Regardless of what type of label you may put on it, all financial solutions consist of debt, equity, or a combination of both.
Debt: Is a loan or line-of-credit for a set amount of money that needs to be paid back within a set period of time.
Equity: means that you will sell a portion of your business and that owner get voting rights and cash associated with that part of the equity stake.
Below are some common ways to fund your small to mid-size business to get started or to cover some additional expenses.
Saving. Cold hard cash is the smartest, safest, and most conservation way to fund your business. However, the risk increases if you use monies set aside for retirement to fund your business, as you may lose more than cash if the business fails. It is strongly advised to speak to a qualified financial advisor prior to tapping into this type of financial resource to fund your small to mid-sized business.
Credit Cards. A cash advance on a credit card is an expensive, but useful option to increase the flow of cash throughout your business. It is important to remember that credit cards are linked directly to your credit score number. If payments are not made timely, it can cost you your financial reputation.
Investments/friends and family. You may offer people you know a piece of your business – but there are a couple of major risks with this option. One being that the relationship may be negatively impacted if the business fails, and the other being that you may gain a partner that is not so silent. If you choose this route, have all details in writing that is drawn up by a lawyer, so there is no miscommunication down the road.
Loans. Getting a business loan from a bank may not be easy because a bank usually wants proof that the business is successful, so they are almost guaranteed to get their money back. This may not be an option for a small business that is less than six months old. – marketwatch.com
Factoring. This option is beneficial is your clients are slow in paying their invoices causing a cash flow problem in your business. The problem with this business financing option is that it can only be utilized if you work with government and/or commercial clients that have reliable credit. When this option is used properly, it can increase your business cash flow and also allow you to obtain new clients. If you quality, this type of loan is relatively easy to obtain and the line-of-credit is flexible.
Purchase Order funds. This type of business funding has been gaining popularity in recent times. This option is designed to aid businesses that resell product at an increased price to pay their supplies. Basically, the finance company will pay the supplier directly (on your behalf) which will help you to place larger orders. Due to the fact that is option is costly and may be a challenge to qualify for – it is only beneficial for transactions that have a high margin and that do not require any customization’s on products.
Equity Crowdfunding. This option is an alternative to borrowing money from traditional financial institutions because you give a piece of your company to investors and they provide you capital for your business. This was very common for new tech companies; however, the trend is moving into non-tech business. Typically personal financial data is not required, but you will need an investor presentation. – forbes.com
For instance, imagine you appear on the popular TV show “Shark Tank” and Mark Cuban invests in your business – this is what is required to be successful to raise money on an equity crowdfunding platform. In the same way, you can set a financial goal and friends, family members, and even strangers will pledge money toward your business. Since pledges will not get a return on their investment or even a donation tax break on their money, it is important to entice pledges with an incentive. For example, if you are writer, you can offer a signed copy of your book to pledges over $15 or if you are opening a restaurant, an enticing offer may be a free dinner.