Running a business requires a lot of dedication, hard work and, of course, money. No matter how small or big your company is, you will need funding to get it up and running and then further funding down the line to help it grow. The good news is that there are many funding options available for small businesses, each with its own set of pros and cons.
In this guide, we will go over some of the most popular funding options to help you make the best decision for your business. We will also explain how to get funding for a business and what potential investors or lenders are looking for.
1. Use Your Personal Savings
This is usually the first option that people think of when starting a business. After all, it is your money and you are in complete control of how to use it. However, using your own savings can be risky. If your business fails, you could lose everything you put in. Another downside to using your own savings is that it can take longer to get your business up and running so if you need funding right away, this may not be the best option.
On the plus side, using your own personal savings means that you do not have to answer to anyone else or give up any equity in your company. You also have complete control over how you use the money and do not have to worry about making regular payments or meeting any other obligations that come with borrowing money.
If you do decide to use your personal savings, make sure to put together a solid business plan and know exactly how much money you need to get started and keep your business running for at least the first year.
2. Get a Loan from Friends or Family
This is another popular option, especially for people who do not have a lot of savings. Borrowing money from friends or family can be a great way to get started because they may be more willing to give you a loan with low interest or even no interest. This can be a great option if you have a good relationship with the person you are borrowing from and you are confident that you will be able to repay the loan.
However, there are some risks involved with this type of funding. If things go wrong or you are unable to repay the loan, it could damage your relationships with your friends or family. You should also be aware that they may not be willing to give you as much money as you need or want.
Before approaching friends or family for a loan, sit down and have a conversation about your business idea, how much money you need and when you expect to be able to repay the loan. It is also important to put everything in writing so that there is no confusion later on.
3. Get a Small Business Loan
A small business loan is another option to consider when you need funding for your business. There are many different lenders out there who offer small business loans, including banks, credit unions and online lenders. The application process can vary depending on the lender but you will typically need to provide information on your business, such as your business plan, financial statements and credit history.
One of the benefits of a small business loan is that you can usually get a lower interest rate than with other types of loans. This can save you money in the long run and make it easier to repay the loan. Another benefit is that you can often get a longer repayment period, which can give you some breathing room if your business is not doing as well as you had hoped.
The downside of a small business loan is that it can be difficult to qualify for one, especially if you have bad credit. You may also be required to put up collateral, such as your home or another asset, in case you are unable to repay the loan.
If you are considering a small business loan, shop around and compare different lenders to see who offers the best terms. Be sure to read the fine print and understand all of the fees and charges before signing anything.
4. Secure Funding from a Venture Capitalist
Venture capitalists are individuals or firms who invest in high-risk, high-reward businesses. They typically invest in companies that have the potential to grow quickly and make a lot of money. In return for their investment, venture capitalists usually get a percentage of ownership in the company. You are probably aware of how this works from the TV programme Dragon’s Den.
If you are able to secure funding from a venture capitalist, it can be a great way to get the money you need to grow your business. However, there are some downsides to this type of funding. First, venture capitalists typically want a high return on their investment and they may pressure you to sell your company or take it public in order to make that happen. Second, they will usually have a lot of control over your company (depending on their equity stake) and may make decisions that may not be in your best interests.
Before approaching a venture capitalist, you need to have a solid business plan and be able to show them how your company will grow quickly and make a lot of money. You should also be prepared to give up a percentage of ownership in your company.
5. Secure Private Equity Funding
Private equity firms are similar to venture capitalists in that they invest in high-growth companies. However, private equity firms tend to be much larger and have more capital to invest. They also tend to take a more hands-on approach than venture capitalists and may be more involved in the day-to-day operations of your business.
Like with venture capitalists, there are some downsides to private equity funding. First, the private equity firm will also be looking for a high return on their investment and that may mean looking to sell the company even if you don’t want to. Second, private equity firms often carry a lot of debt which could be detrimental to your business down the line if things go wrong.
Before approaching a private equity firm, you need to have a solid business plan and be able to show them how your company will grow quickly and make a lot of money. You should also be prepared to give up a percentage of ownership in your company.
If you decide to go down this funding route, it is crucial that you choose a reputable and experienced private equity firm. You should also be prepared to give up a percentage of ownership in your company. Make sure you have a solid business plan which includes everything from your sales projections to your exit strategy.
6. Find an Angel Investor
An angel investor is an individual who invests in a small business, typically in exchange for equity. Angel investors look for businesses with high growth potential and are often willing to take a risk on businesses that may not be profitable yet.
The advantages of securing investment from an angel investor are that they can provide you with the capital you need to grow your business and they typically don’t require a high return on their investment. The downside is that angel investors may want some say in your business operations, particularly if they have a large stake in the company or if they are the sole investor.
If you are looking for an angel investor, start by networking with people in your industry or pitching your business at startup events. You can also search online for angel investors who may be interested in your business. The important thing is that you are able to show the potential investor that your business has high growth potential so make sure you have a comprehensive business plan as well as a polished and well-rehearsed pitch.
7. Create a Crowdfunding Campaign
Crowdfunding is a novel way of raising money by asking a large number of people to each contribute a small amount of money. Crowdfunding platforms such as Kickstarter and Indiegogo allow businesses to pitch their products or services to the general public and receive funding from individuals who are interested in supporting them.
Crowdfunding can be a great way to raise money for your business, particularly if you have a product or service that is appealing to the general public. The downside of crowdfunding is that it can be difficult to reach your funding goal and you may not get the full amount of money you are asking for.
If you decide to go down the crowdfunding route, make sure you have a well-thought-out campaign and that you promote it widely. You should also set a realistic funding goal and be prepared to give away some equity in your company.
While there have been some hugely successful crowdfunding campaigns, there have also been many that have failed to reach their funding goals so don’t be disheartened and always have a Plan B in mind.
8. Use Business Credit Cards
Another option for funding your small business is to use a business credit card. Business credit cards can be a great way to get access to cash when you need it and they often come with valuable perks such as rewards points or cash back.
The main advantages of using a business credit card are that you can get access to cash quickly and easily and may also get some benefits such as air miles, airport lounge access and cashback. Furthermore, you can often get a higher credit limit than you would with a personal credit card.
The main downside of business credit cards is that they usually have high-interest rates so it is important to make sure you can pay off your balance in full each month or you could end up paying a lot of money in interest. Another downside is that if you default on your payments, it could damage your personal credit score as well as your business credit score.
To avoid this, make sure you only use your business credit card for business expenses and that you always make your payments on time. You should also try to keep your balance below 30% of your credit limit to avoid damaging your credit score.
9. Obtain a Government Grant
Another option for funding your small business is to apply for government grants. Government grants are usually awarded to businesses that are engaged in activities that benefit the public good such as research and development, export promotion or environmental protection. Some of the most sought-after grants in the UK include the Research and Development Tax Credit, the Small Business Research Initiative and the Regional Growth Fund.
The advantages of securing a government grant are that you don’t have to pay the money back and it can be a great way to get free money to grow your business. The main downside is that government grants are usually very competitive so you may not be successful in securing one.
To apply for a government grant, you will need to submit an application which will be assessed by a panel of experts. If your application is successful, you will be awarded the grant which you can then use to fund your business. This process can take several months so make sure you apply well in advance of when you need the money.
One of the biggest challenges for entrepreneurs is working out how to get funding for a business. As you can see, there are a number of options available to you, each with its own advantages and disadvantages.
The most important thing is that you do thorough research and choose the option that is right for your business. Whatever route you decide to go down, always remember to put together a strong business plan and make sure you have a solid understanding of your financial situation before you start to look for funding.
By following these tips, you will be in a good position to secure the funding you need to grow your business and turn your entrepreneurial dreams into a reality.