How to fund a business venture
Funding your small business can take on many forms. A lot of small business owners start by bootstrapping, meaning they self-fund the business, relying on personal funds and savings to build and grow their business. This can be time-consuming, not to mention stressful, especially if you’re trying to make a living while you’re growing your business.
If you need more money than what you can pull out of your personal savings, don’t worry. You aren’t alone. There are plenty of business financing options available for people like you who want to grow a business but don’t have the luxury of having millions of dollars at their disposal to sink into it.
The two main ways to finance a small business are through debt and through equity.
What does it mean to finance a business through debt?
Financing a business through debt means you take on a debt, such as a loan. This gives you access to quick cash, which you pay back over time. The benefits of financing a business through debt are that you get quick cash. The main drawback is that you have to pay interest on it, so you’ll end up paying back more than you originally took out. If you aren’t careful, you can end up in a cycle of debt, which can wreak havoc on your credit score (if you don’t pay your debts on time) and weaken your ability to ever get ahead.
Types of business financing through debt
Banks do offer business loans, but only about 20 percent of businesses who apply actually qualify for them. You need to be an established business with a proven track record of making money. You also need to have good to excellent credit and a solid business plan. Look into online banks if your usual bank doesn’t have a business loan option that you qualify for.
The Small Business Association (SBA) doesn’t provide loans directly, but they do work with lenders to offer loans to small businesses. SBA backed loans have less risk for lenders, which makes lenders more willing to offer loans to small businesses through the program.
Business credit cards can make it easier for you to purchase items upfront and pay them back over time. As with any type of credit card, though, take care to pay back as much as you can every month so you don’t sink into a cycle of debt. Credit cards are among the eaiser ways to get debt financing, but they come at a much higher interest rate, sometimes as much as 20 percent or even higher. If you miss payments, your credit score will plummet, making it harder to get more loans or credit in the future.
What does it mean to fund a business through equity?
When you fund your business through equity, you trade away a piece of your business to an investor. In exchange, the investor gives you money up front and becomes a co-owner in your business. They will get more money at an agreed upon point in time, provided your business continues to grow.
Investors like to put their money in businesses that support their own personal beliefs and mission, and they want those businesses to succeed because they’ll get more money as a result. Therefore, they’ll usually also act as mentors and guides to help you as you build your business.
The two most common types of small business investors are angel investors and venture capitalists.
>>Read more: Venture capitalists vs angel investors
Types of business financing through equity
Angel investors are indpendent accredited investors who use their own money to finance a startup business. An angel investor can be someone in your social circle, or it can be someone you find through a network like Capital Raising Club. Angel investors are generally retired business owners who enjoy mentoring small business owners and helping them grow their business.
Venture capital (VC) firms are larger firms of investors and companies that generally invest in established companies with a proven potential to grow over the long-term. They invest more money than angel investors and usually don’t want to be involved in day-to-day operations. They will likely expect a seat on your Board of Directors.
You can take on debt in the form of loans, credit cards, cash advances, and equipment or invoice financing. These can all be viable ways to get cash fast. The downside is that you have to repay your debts, with interest, over time.
With business equity, you get cash upfront from investors who believe in your business and who will offer their guidance and support as you build your business. The more established your business is, and the more well presented your business plan, the more likely you are to attract an angel investor or venture capital firm.