Sometimes we have the right idea, the right business plan, and the right attitude to get our dream started and off the ground. However, we may sometimes lack one of the most important pieces: the money to finance our business.
All businesses require a certain amount of money to start up, some more than others. When money is the only thing holding us back from achieving our goals, it can be an absolute nightmare.
Thankfully, you do not have to be on your own for this, and there are multiple ways for you to get the money that you need from one or various sources.
This guide will help you look at the different options you have around to help you finance your business.
Considering debt and equity
First of all, it is essential to know that there are only two ways of financing a business: debt and equity.
Debt signifies anything from a loan to a credit line that you will be able to access when you need and will need to pay back with interest over an amount of time decided by the source. As you may know, most sources will secure their loans with assets that they can take from you if the loans are not reimbursed in the agreed amount of time.
On the other hand, equity means selling a percentage of your business to one or multiple investors. In some cases, the investors will ask to be paid back when possible but will return their share of the business in return. In most cases, however, the investors will not ask to be refunded but will, in turn, keep a percentage of your business with voting rights, benefits, and a shared income.
The way that you choose to finance your business is entirely up to you, and you need only agree to the terms that suit you and your business; however, it is essential to know that in nearly all cases, small businesses do need to be financed by someone or multiple people outside the business itself.
With that in mind, here are a few of the ways that you could finance your business effectively, moving forward.
Savings always offer an ideal way to start and finance your business. Ideally, you will have saved money over a long time (starting off early is always best) and having a good amount to help kick start your business. This is the best way to start a business as the money is entirely yours, and you do not need anyone’s or as many people’s help and input. It will leave you with as much control as possible over your business and will help save you from any debt.
The obvious issue with this method of financing is that A: not everyone has access to a large savings account, and B: your savings are limited. Even if you have been saving up for most of your life, the amount of money that you can safely use will be limited by the amount of money that you physically have available. Even large amounts of savings have a tendency of depleting quickly and may not be able to take you all the way with your business.
Moreover, it is never a good idea to use the money that you may have set aside for your retirement, a home, a car, or any other significant investment. Should the business not work or not be as profitable as you initially hoped, then using this money is a very dangerous gamble and could take away from your future.
Borrowing from a loved one
Many small businesses start-up thanks to investments from family and friends. Usually, as loved ones, they will (hopefully) not come to take your things or start knocking down your door if you do not pay them back in time, which makes them a little less stressful to deal with as loaners.
It also means that you will most likely not have to present such a tight presentation to them in the hopes that they will help, which should save you some time and effort. The problem, of course, lies with your relationships with them. No business is a guaranteed success, and in the worst-case scenario, the business could end up failing, and you could lose their money without any guaranteed way to pay them back quickly or in full.
On the other hand, if the business does go well, then your friends or family members may not want to be reimbursed and may decide that they would like to remain as a partner in your business. Money can be a real source of tension in relationships, and even if you trust them wholeheartedly and get on well, there is no guarantee that this kind of loan won’t cause irreparable damage in your personal life. Tread carefully.
Bank loans remain some of the most popular routes for financing small businesses, as they can usually guarantee an impressive amount of money and help to get things started. Some bank loans are perfectly reasonable, offer a good amount of time to pay back the loan, and offer affordable interest rates.
However, it is crucial to read through the proposed contract carefully and to ensure that you do have the potential to pay back the amount of interest that the bank is asking for. It could be worth speaking to multiple banks, although the best ones to work with are usually the ones with which you already have a rapport.
Obviously, unlike family and friends, banks will expect their money back within the agreed amount of time and will take matters into their own hands if they are unhappy. They may ask you for certain assets that they can put against your loan when you request it, i.e., belongings that they can take in lieu of the owed money.
Credit cards can initially seem like gifts that keep on giving when we first get them. You can spend a large amount of money with them over the course of the month, which is ideal for paying vendors, construction workers, initial bills, etc.
However, the end of the spending period will come and will need to be dealt with by paying money into the appropriate account. Moreover, credit cards significantly affect our credit scores. It will be continually monitored how you use the card, whether you are vigilant, a big spender, and whether or not you can actually afford the bill that will be coming. As long as you use a credit card responsibly, it can be a great way of starting a business.
Crowdfunding has become an increasingly popular way of getting the money to start a business. It does take quite a long time to work, depending on the number of people that you reach and how, but it can be a very efficient way of starting and financing your business.
The idea is to request money online from the public as a donation, a loan, or in exchange for equity in your business. If the people are interested enough in your idea, then they will send you the amount of money that they choose.
Depending on the amount that you need to get started, this could take many people and a lot of time. The problem with Crowdfunding is that you cannot guarantee that you will get the money that you need, it can indeed take a long time, and you could get a lot of strangers involved in your business, depending on what you promise them in exchange for their investment.
A business angel investor is someone, or even a group of people, that fund multiple businesses, small and large, in exchange for equity. The good thing about angel investors is that they generally know what they are doing.
They will have contacts and experience that they can share with you, which will help you grow your business and fast. However, the problem is that they will expect a decent amount of equity in your business, including voting rights and profit. This will inevitably mean that you will not have complete control over the business and that they may even take quite a substantial amount of that control.
Research and development grants only apply to specific kinds of businesses, but should yours be applicable to the grant, then you may be entitled to money from the government that you didn’t even know about.
In short, research and development grants are sums of money that the government gives to businesses that are undergoing essential and innovative research and development of a product or idea that could significantly influence and aid the world.
Of course, in order to receive this kind of grant, your business will have to undergo certain examinations from the government in order for them to ensure that the grant will be going to someone and something worthy. If you do receive the grant, then you in no way have to repay the grant at any point.
We hope you’ve found this guide on how to finance your business useful – remember, you don’t have to have all of the money available right now to get started! Need help growing your business? Why not contact us online or give us a call on 01604 267677.