5 Small Business Funding Options for Your Own Business
Whether you’re in the idea phase or you’ve already incorporated your business, there may be a time when you need financing. Some businesses are able to grow organically, often with the owners bootstrapping the venture to success.
But bootstrapping is different for every business.
You may be able to bootstrap one business and not another. When financing is needed, there are traditional and alternative financing options.
There’s the option to ask friends and family members for funding, and some business owners will self-fund a business using their own income. But you can also choose other routes.
1. Business Loans – Secured and Unsecured
Secured and unsecured business loans exist. Unsecured are better because you don’t have to back the loan, but in either case, these loans are often only available when a business has decent credit.
Small business loans, backed by the Small Business Administration, are also an option.
2. VC Funding
Venture capital funds help inject funds into a business, but the funds come at the loss of equity. These funds aren’t paid back, yet the investor wants a stake in the business. Small businesses that are able to secure VC funding were able to show that they have strong growth potential.
This is a form of private equity investment, and it’s an investment option offering high-risk and high-reward for both parties.
3. Invoice Factoring
A common form of alternative small business finance is invoice factoring. This form of factoring requires the business to “sell” their invoices to a third-party. Let’s assume that a business has $10,000 in pending invoices that need to be paid and needs capital to fund payroll.
The business can no longer wait for the invoices to be paid, so what they’ll do is “sell” these invoices to another company.
Of course, the sale of the invoices will come at a discount. The business may sell the $10,000 in pending invoices for $8,000 with an agreement that 20% of the recovered funds will be reimbursed to the business minus fees or a percentage of the invoices.
4. Working Capital Loans
Working capital loans are short-term loans that are provided to a business with short repayment periods. The goal of a working capital loan is to help bridge the gap in a business’ cash flow. Loan providers will want to make sure that the capital provided will result in enough revenue to cover the loan.
5. Crowdfunding a Unique Idea
If you have a unique idea, crowdfunding may be able to see that idea through fruition. The rise of crowdfunding has helped several businesses go from idea to product with tens of thousands of small investments from people.
Crowdfunding can be done on sites, such as Kickstarter.
But you’ll find that crowdfunding requires a unique idea or approach to work well.
Small businesses that need financing, especially in the initial stages of the business, will often need to self-fund the business or provide a guarantee. Work on your business’ operation and product, focusing on meeting the client’s problem while seeking funding for your business’ early stages of operation and growth.
Infographic created by Donnelley Financial Solutions, an SEC reporting software company
