To grow your business beyond the heights of success, you will need a constant supply of money. The challenge is more serious when you have just established your business. Since it will take some time to reach the profitable level, you must have enough funds to hit the ground running.
Your savings will be the first thing you would dip into, but they are only sometimes sufficient. You may need external funding sources to ensure the smooth running of your business.
What options do you have to fund your small business?
Here are the funding alternatives for your small business that ensures its growth:
Family and friends
In the early stage of a business, you should seek funds from your family and friends. One of the significant advantages of borrowing money from them is that you do not have to pay interest on top of what you borrow. This alternative is suitable for those businesses which only need a small number of funds.
Here are the pros and cons:
- It is a quicker funding source with flexible payments.
- You may not have to pay interest, and if you need to, it will not prove to be an expensive alternative.
- If things go wrong, it can damage the relationship.
- You may fail to analyse the impact of your business failure on your ability to pay back.
A bank loan
Traditional bank loans are still popular when it comes to financing your small business. This option may work in your favour if you have a good relationship with your bank.
You will still need to submit a business plan to prove that there are chances of success. A bank will only lend you money if you are able to give them a clear picture of how you are going to use that money and how your business will benefit from it.
Here are the pros and cons:
- A bank loan may fund your large needs of money, unlike borrowing from friends and family.
- The process of getting a bank loan may be time-consuming.
- You may have difficulty qualifying for a loan at a lower interest rate if you have a bad credit score. This may result in rejection as well.
Loans from a direct lender
When banks refuse to lend you money, direct lenders can come in handy. They may lend you a small or large amount of money based on your business needs, but you will have to submit a business plan to prove your business will grow.
A lender wants to know it to ensure you will not fall behind on payments. When banks turn you down, direct lenders can lend you money.
Here are the pros and cons:
- The processing is faster as compared to banks. If you need funds quickly, direct lenders will be a better alternative.
- You are eligible to get the nod even if you have a bad credit rating. If you need a small amount of money to fund the gap, a direct lender can sign off on quick loans for the unemployed as well.
- Interest rates could be a bit higher if you borrow money despite a bad credit rating.
- Failing to pay off the debt may cause serious consequences. You can also lose your collateral and fall into an endless circle of debt.
Crowdfunding
Crowdfunding is the best option for those businesses that need small to medium-sized funds. It lets you borrow money online from the general public.
A group of people come together and contribute a small amount of money on the internet, which is lent by crowdfunding platforms to people like you. This form of alternative seems to be the best when you borrow only a small amount of money.
Peer-to-peer lending may only let you borrow a small number of funds for your business. If your business is highly propitious and grows as rapidly as possible, you can easily afford this kind of borrowing.
Here are the upsides and downsides:
- It can be more expensive than borrowing from online lenders.
- The larger the pool of people, the better deal you will be able to claim.
- It can take a long time to get approval. It is time-consuming.
Short-term business loans
Small business loans can kick off a project as they can provide you with an immediate injection of cash. The repayment length of these loans may be up to five years, depending on the amount you are borrowing. If you need a small amount of funds in the beginning stage of your business, you can apply for loans for the unemployed with direct lenders. This funding alternative will only let you borrow money when you have a stable source of income.
Here are the advantages and drawbacks of these loans:
- The processing of these loans is very quick. You will likely get money the same day you submit the loan application.
- You can borrow money despite a poor credit report. You will pay down the debt over an extended period so that you can improve your credit score.
- These loans can be pretty expensive if your credit rating could be more impressive.
- The cost of the debt can quickly mount up in case you fall behind in the repayments.
Angel investors
If your business needs a large sum of money as capital, you will need angel investors. They do not lend money, but they invest money in your business in exchange for what they will get a share in the profit of your company.
Here are the benefits and drawbacks:
- You can borrow a large sum of money which is not possible with other funding sources.
- In addition to cash, you will be able to get benefits from the experience they have.
- You will have to give up some control over your business, which means they are a member of the board of directors.
- You may need their consent as well in order to implement a strategy or take a business decision.
Venture capitalists
They may offer you a more significant investment than angel investors. This comes in handy when your business needs to grow quickly. If your business has high growth potential, there may be a better alternative.
Here are the pros and cons:
- You can get the expertise to help grow your business.
- You may have to give up a significant share in equity.
The final word
If you have a small business, it can take a lot of work to ensure its growth. Just savings may not be sufficient for your start-up business. You may need to rely on external funding sources. There are various alternatives you can use to fund your business.
Whatever source you use, make sure you are aware of its pros and cons. Not all types of funding alternatives will be suitable for your business. Try to have a good credit score, have a business plan to prove that it has the potential to grow and do some prior research.
