Do you want to start your business but have no idea how to raise funds for it? What are some ways to finance your new enterprise or extension? What are the advantages and disadvantages of each funding source?
Hello everyone! I’m Antoaneta and welcome to my blog edition. Today, we’ll talk about ways to fund your new business. I hope you’ll learn something useful today.
There are thousands of people who start businesses every year. There’s one thing that these people have in common, and that’s to find the cash to finance their company. As an entrepreneur, you can choose between venturing into a new business or expanding your existing one. Either way, raising capital can pose a big challenge whether it’s for starting or scaling up your business.
Diversifying your sources of financing places you in a better position to weather the downturns that may arise. It can also help you get the appropriate funding to support your specific needs. Each of these sources has its specific advantages, disadvantages, and conditions to assess your business.
This is perhaps the wisest, conservative, and safest way to finance your business. Ideally, you should be able to save money over time and use it to fund your company. However, the amount that you’re able to raise is limited only to our savings. Some entrepreneurs take a step further by taking money out of their home line credit, insurance policies, or retirement plans.
The disadvantage of this is when the business fails, you’ll lose your home, insurance, and your retirement. This option may prove to be unfavorable if things don’t work out since many small companies only last for five years. Using your savings to fund your new business is a common alternative. But you should consider talking to a professional financial advisor first if you’re thinking of using your retirement savings, home loans, insurance loans, or similar loans.
Sell Items You Don’t Need
The first workable option is to sell high-priced items that you don’t need anymore. You can sell them on online platforms such as Facebook, Amazon, or eBay or in your nearest shops. This also helps declutter your house, removing excess items you don’t use as well as giving you additional cash for your business.
Friend and Families / Love Money
This is one of the most common sources of funds for your business. You can ask your friends or family to make an equity purchase or ask them for a loan. The problem with love money as the source of funding is if the business fails, you’ll risk ruining your relationship with your family. Second, you’ll possibly gain a business partner even if you don’t want to.
A partnership is a legal form of fund contribution into one account from two or more individuals or entities to share the liabilities and profits. There are two types of partnership. The first one is called general partnership where partners are personally responsible for the company’s liabilities. Second is the limited partnership, wherein partners’ assets are protected from claims of the firm’s creditors.
Trade credit is an arrangement of one entity to another to buy goods or services without paying immediate cash. This allows you to use your profits generated from sales, to pay your debts. If your business has a good credit history and can meet the supplier’s requirements, then credit trades become easy to agree upon and maintain.
When favorable terms and conditions are being agreed upon with a supplier, trade credit helps you grow your business. This agreement can put less pressure since you won’t need immediate cash to put upfront. Although credit terms vary from one supplier to another, its interest is relatively low and gives you enough time to qualify for discounts.
An angel investor is an individual who’s willing to invest in a business start-up or expansion. Their objective is to acquire an equity position in the company and receive higher return rates than traditional investments. They can also provide you with their expertise, connection networks, and practical guidance to quickly advance your enterprise.
Getting an angel investor can be difficult because they want to ensure the growth potential and viability of the business plan with a realistic exit strategy so they can recover their investments. In exchange for money, they reserve the authority to oversee the firm’s administration practices. Angel investors may demand full ownership of your company depending on the amount of cash they invest.
To avoid diluted ownership, retain an attorney or a certified public accountant to help you study the structure of an equity sale. You must also understand what the angel investor is like to work with since you might have disagreements on how your company should be handled.
One way of placing capital on a small business is to fund it using a credit card. This is commonly appealing to most entrepreneurs who don’t have enough money available to them. You’ll enjoy some advantages of lower interest rates, reward programs, and no equity loss. However, this is risky as you’re unsure if your business will succeed and will generate enough money to pay your debt. In using your credit card to fund your business, you should:
- Read the terms and conditions – read the agreements carefully and know what you’re getting into. Don’t hesitate to ask questions and send the card back if you don’t think it’s suitable for you.
- Pay quickly and on time – don’t let your debt accumulate any additional interests by paying regularly.
- Negotiate a lower interest rate if possible – your regular payment could pay off and, you may be able to negotiate a lower interest rate that can help you pay quicker.
- Never exceed your credit limit.
- Ensure an accurate monthly statement to detect possible frauds
Shop around and find a bank that suits your financial needs. Carefully accept offers with advantages such as customized repayment or personalized service. The problem with this source of funds is they’ll only finance your company if you have considerable collateral and a decent history of profit. This type of funding may not be a preferred option for small enterprises with limited experience.
Your customers are one of the main sources of finance that can help grow your enterprise. It requires a consistent reputation in the field of your business. You can grant cash discounts to customers who make early payments and encourage cash payments instead of credit terms.
A microloan is a reasonably small amount of money that’s issued through credit and payable within a short period. Its popularity and demand as a source of the fund are growing increasingly because of its availability to a wide range of borrowers. Its pros include quick cash withdrawals so you can immediately start your enterprise. It also comes with no paperwork and people are ready to pay high interest on the loan just to get rid of it.
Its cons are its high-interest rate which, if not paid on time, will bring you into the court of law. Moreover, interest grows each day if unpaid, making the amount bigger. Be careful of fraudsters as you might fall into their scams.
A helpful microloan program known as the Small Business Administration or SBA provides loans for up to $50,000 for small enterprises. The loan is funded by intermediaries who have technical assistance and training offers that often help in the success of your company. This is an appreciable alternative for entrepreneurs who need money to start new or expand their businesses.
Social lending or crowdfunding
Crowdfunding is a way to fund your business by collecting donations from individuals, entities, organizations, and more. Most campaigns are streamed through the internet and raise awareness to reach more potential donors. Before venturing into crowdfunding, let’s look at some of the most successful online platforms you can use.
- GoFundMe – is a great option for non-profit organizations and businesses that are service-oriented.
- Kickstarter – helped companies raise funds since 2009. The site is simple to use. Set a monetary goal and time when you want to reach it. Share your story and your project in the community to gain more supporters.
- Indiegogo – offers two types of funding – fixed funding and flexible funding. Fixed funding allows you to set the amount of money you want to raise. But, if you don’t reach it, all pledged money will return to its donors. Meanwhile, in flexible funding, you’re in for any monetary value. You’ll get to keep it all whether you achieve your target or not.
Grants and Subsidies
Grants are funds bestowed by the government or a non-profit organization which is called Grantmakers, to an eligible recipient. It may not necessarily come as cash but may come in the form of a fixed asset such as equipment or land. Most small businesses are awarded grants to help commence their operations. It aims to improve the economy and generate more jobs for the community.
The disadvantage for grants is its competition is usually heavy. Moreover, government grants are often requiring complex processes and stages. Each type of grant has its requirements and standards for applying. Here’s how you may apply for a government business grant:
- Prepare your business proposal – the grant provider body will need to see a professional business plan. Recent business positions and balance sheets are expected if you’ve started trading already.
- Jump into application early – Apply early when a scheme first launches. The reason for this is because grants may have a limited amount of money to offer as well as there’s a possibility of lesser competition in its early stages.
- Communicate with the grant body – talk to the appropriate grant provider body to assess if you qualify for a successful application.
- Learn the grant purposes – study what this grant aims to achieve and why it’s being awarded. Its objectives include hiring an employee from a local community or developing eco-friendly products. Write your application as closely as possible to the objectives to have the best chance of successful application.
- Match your investment with the grant – most grants would want to match the amount you’re investing, so if you seek a $10,000 grant, make sure you invest this amount also.
Bear in mind that the viability of these sources of funds can change over time especially with the shifting economy. How much money you need will depend on the growth of your business. Making the best choice that fits your financial needs is crucial for your success.
Thank you for reading this blog. If you’ve learned something or you find this blog informative, please share this with your friends and family. You might be able to help them find ways to finance their new business through this blog. You can check out out my previous blogs such as ”Plans and how to make good on them“. If you want more of this content, kindly subscribe to my newsletter to always be in the loop.
Recommended for further reading:
- Unshakeable: Your Guide to Financial Freedom
- Keys to Success – Napoleon Hill
- MONEY Master the Game – Tony Robbins
- Think and Grow Rich! – Napoleon Hill
- Rich Dad’s Guide to Investing