Starting a business is not as easy as it sounds, as you have to take care of several things because a startup means you are starting from scratch. You must have complete knowledge about business setup. Do you think that only knowledge is enough to support your innovative idea? With knowledge and your different idea, you must have financial support as well.
For financial support, you have different choices. The most relevant choice is a loan from financial institutions. Most of the small businesses face bankruptcy due to their incompetence in the finance department. First, you must have sound financial support to introduce your idea to the market and then, you must have funds to reach the maturity stage of the business.
Most of the businesses ask that how to fund their small business. When the question for financing arises, there are two ways of doing it; debt financing and equity financing. Here are the two methods with their classifications to help you in a better way.
Debt financing is a method of raising funds for capital expenditures by selling instruments to institutions or individuals. The buyers become creditors and the firm becomes liable to pay the principal and interest rate to which both parties agreed for making the transaction. Firms usually sell bonds, bills, or notes for debt financing. It is the most common type of small business funding. There are further three divisions of debt financing.
Small Business Administration Loans
Small Business Administration or SBA loans are term loans offered by financial institutions. The loan can cover up to 80 percent of the total requirement you require to start your small business. SBA isn’t the direct institution that lends you money. It links lending platforms with you and serves as a third party. The benefit of SBA loan is the guarantee or risk-free borrowing and lending. You and the lender can trust each other with the finances.
Small Business Lenders
Different organizations are always interested in investing in small businesses. If you do a little research on this, you will come across many firms that are willing to finance small businesses. The loan is backed by a strong asset and the interest rate is usually high. It may be risky for some people, but it is still among the priorities of small businesses. Be careful with such loans because you might misinterpret the interest rate.
Banks are Always There For You
If you cannot find any reliable source, head towards the bank as such a financial institution will never let you down. The bank lends you money but you’ve to show them your credit score. Moreover, they might ask for security in the form of an asset. The major reason for borrowing from a bank is that it’s a reliable source of finance. There is the least possible risk involved in loans from banks.
The second major type of funding is equity financing. A long-term fund isn’t always required. Some businesses need funds for a shorter time span. For this purpose, firms also choose equity financing. For this type of finance, companies sell shares and the funds are invested in the growth. Equity financing is not restricted to private or public sector firms, but your friends and family can also invest through shares.
Bootstrapping means that the business doesn’t need any loan for funding the business. The profits of the business are sufficient to help in growth and stability. Small businesses and startups are unaware of bootstrapping because, for them, every financial problem provokes them to ask for a loan.
The majority of lenders check the credit score and financial statements before agreeing for a loan. In many cases, the loan application is turned down, because the business’s profits can support the firm. Make sure you check your financial circumstances thoroughly before asking a lender or financial institution for a loan.
Personal Savings Can Help
Entrepreneurs mostly fund the business themselves for growth and ease of business. Personal savings not only mean you have a handsome amount of cash in your bank account. It refers to all the assets that you can use for funding your business. You can although also use personal savings or debts like credit cards for funding. Also, you can sell any assets like a second car or apartment to generate cash and support your business.
Your Trustworthy People
Friends and family always seem to be the most reliable source for financial support. Your business couldn’t get help from a better source. Asking from your contacts for financial support for your business could be beneficial.
Remember to be in agreement with people who are rational as financial situations have been long cursed for destroying relationships. You cannot trust anybody else more than your close people or a financial institution, but be sure that your business matters shouldn’t spoil any of your relationships.
Some of the affluent individuals are angels who are willing to invest in your small business, as wealthy individuals surround you most of the time. You may call them generous but contacting angel investors is a good thing for your small business.
Search on the web about angel investors and you will find individuals as well as groups of individuals who pool their resources and research for your business. They usually invest in your business in exchange for debt or ownership equity. Go through the aims and objectives, terms and conditions before making any decision about angel investors.
A large number of individuals collect funds and invest in businesses. This idea is referred to as crowdfunding. This is usually practiced for new businesses or small business ideas. This has provided opportunities to the entrepreneurs to collect thousand and millions of dollars from different people and invest in their business. The amount invested can be as low as $10 while maximum has no limits as crowdfunding sites earn revenue from a set percentage of the funds raised.
The Final Verdict
Small businesses need a handsome amount of finance to keep their business going. First, they need to get started but once they get onboard with others, they need funds to efficiently and effectively survive in the corporate world.
Debt and equity financing are the two major types of finances you’ll come across during the funding search. The others are further categories of these two types. The most commonly found funds are debt finances because the financial institutions are the most trustworthy, whereas, equity financing may not be a suitable option in every case.
If you are unaware of the funds that you can choose for your small business, then we hope that the above-mentioned information might have cleared up your mind. We wish you good luck with your future endeavors!