Expanding a new venture will take you through some exciting milestones: your first sale, your first paid employee, and your first physical location. As your business grows, you may find yourself planning to expand your inventory, launch a new product line, or even enter a new geographic market or customer category.
But growth comes with costs, and the initial capital for your business can take you far. However, there will likely be times when you need new funding.
Planning could be the difference between successfully scaling to the next profitable level – or growing your way into unexpected bankruptcy. Planning involves knowing about the available options for business financing, should you need it.
What is business financing?
Business financing is the securing of capital from third-party sources to fund a new or existing company. Business financing can be beneficial for seasonal sales gaps, unexpected downturns, and growth and development challenges. Business financing is also useful for entrepreneurs starting a new venture.
What is business debt financing?
Debt financing involves borrowing from a bank or another lender and paying it back over time with interest. Examples of debt financing include business credit cards, loans, invoice factoring, and bonds.
What is equity financing?
Equity financing is when you raise funds by selling a portion of ownership in the company to investors. Selling shares is an example of equity financing. Equity financing is essentially the opposite of debt financing – the former involves selling equity while the latter involves selling debt.
Business financing: 14 options in 2023
Here are some of the best options for small businesses looking for funding in 2023.
1. Bank loans
Bank loans involve borrowing from a bank that you can reinvest in your business. You can take a small business bank loan or a personal bank loan, each having its own benefits and drawbacks. Borrowing for your business against your personal assets is risky, but it can be done.
The average interest rate for personal loans is just over 10%, and small business loans range between 5% and 7%.
2. Online loans
An alternative option for business financing is through online loans. These loans are offered online, typically. Lenders are usually financial services or related fintech companies, although many banks also offer loans online. Only 11% of small businesses sought this funding option in 2021 to cope with pandemic-related challenges. However, the popularity of online loans is on the rise – borrowers were more likely to apply for an online loan and less likely to apply at a small bank in 2021 compared to 2020.
3. Small business grants
Small business grants are funds awarded to entrepreneurs and small businesses by private and public entities, government agencies, corporations, and individuals. The business does not have to pay back the money; however, the funds typically must be used in a specific way. The goal of the grant is to invest in a business that aligns with the investor’s vision and values. Thus, each grant has its own requirements, and the amount of money available varies widely.
4. Small Business Administration (SBA) loans
SBA loans are issued by the Small Business Administration in the United States through a variety of loan programs offered through the Small Business Administration. These loans are considered a form of business debt that is managed either by the Small Business Administration itself or one of its network of certified private lenders (with loans backed by the SBA).
5.
Cooperative Credit Association Financing
The Cooperative Credit Association is a financial institution, like a bank, except it is owned by a nonprofit financial cooperative made up of members rather than a profit-driven commercial entity. Cooperative associations offer many of the same products and services provided by traditional banks, including capital for business financing.
6. Crowdfunding
Crowdfunding has become a popular way to raise money for startups. It involves soliciting many small donations from the public, rather than a large sum of money from a single donor or a few donors. Online crowdfunding sites, peer-to-peer payment platforms, and social media have made crowdfunding accessible to almost everyone.
7. Microloans
Microloans are smaller loans of up to $50,000, although the average microloan for small business management in the U.S. is around $13,000. The loan matches borrowers with intermediary lenders – lenders are community nonprofit organizations, each with its own loan eligibility criteria.
8. Merchant Cash Advances
A merchant cash advance is a business financing option where entrepreneurs pay it back as a percentage of sales, plus a small fee. It is best for small businesses that need working capital and accept card payments from their customers.
9. Cash Flow Loans
A cash flow loan is a term loan offered by banks based on the expected cash flow of the company. Instead of using the company’s assets or the individual’s assets as collateral – as shown on the financial statement – the cash flow loan is based on the cash flow statement. It is particularly useful for service companies, digital product sales, and businesses that do not own or hold a lot of assets. It is also helpful for businesses preparing to start that do not have many assets yet.
10. Business Credit Cards
Business credit cards resemble personal credit cards, although they often come with higher limits and business-specific features. Opening a business credit card is usually a good idea, even if you do not need access to funds, as it can help you build a strong credit history, as long as you keep payments timely.
11. Seller Financing
Seller financing is when the seller provides capital to the borrower on the condition that the capital is used to purchase products or services from the lending seller. This is the case when someone hires out to purchase a property. Thus, it is a good option if you are looking to buy a retail store, warehouse space, manufacturing facility, commercial office, or other business property. Seller financing may also be an option when buying a business from someone else.
12. Equipment Financing
Equipment financing specifically refers to business loans that are taken out for the purpose of purchasing machinery or equipment for the company. This is a good option if you are looking to buy equipment to conduct manufacturing in-house, POS systems, and computers for a new retail store, or equipment for managing a large warehouse space. You can also use equipment financing to rent, repair, maintain, or service equipment in other ways.
13. Angel Investors
An angel investor is a wealthy individual who provides funding to a startup, often in exchange for equity in the company. These investors typically invest between $25,000 and $500,000 in a venture.
14. Venture Capital
Venture capital (VC) is a type of financing provided to private companies by investors in exchange for a partial ownership stake in the company. VC is typically a firm made up of multiple members, while angel investors are usually individuals. Similar to angels, venture capital investors usually take an equity stake in the company as a form of compensation.
Financing
Small Business
Some of the best small business loans available at the time of writing this article include:
- Shopify Capital
- SBA 7(a) loans from the U.S. Small Business Administration
- American Express Business Blueprint program
- Biz2Credit loans
- Fundbox loans
- Funding Circle loans
- Microloans from the U.S. Small Business Administration
- Small business loans from OnDeck
How to Get Business Funding
1. Improve Your Credit Score
A good credit score indicates a strong likelihood of fulfilling your promise, whether it’s repayment or something else. Building a strong credit history for your business is crucial, and you should start from day one.
2. Have a Plan
In business, there are few things worse (or with a high potential for failure) than having to scramble for capital on short notice. Planning well ahead of your anticipated needs is the smartest way.
3. Determine How Much Business Funding You Need
The amount of funding, of course, is a matter of business judgment. If it’s too little, the cushion may be too thin if something goes wrong. If it’s too much, you risk stunting your growth today to protect yourself from an event that may never happen.
4. Focus on Financial Aspects
The first step is to build an emergency fund for your business so that you can survive the onset of a recession or an unexpected negative event, or even a positive event in the form of unexpected growth.
5. Know Your Options
Don’t hesitate to explore options and get offers from various sources. You are not obligated to anything until you sign the documents. When you know your options, you can also use that information to negotiate better terms or rates.
6. Prepare an Attractive Plan
There will be an application and evaluation process regardless of the financing option you use. Be prepared in advance with some preparations. Assemble a folder containing your business plan, financial statements, product catalog, and any other relevant information. Then develop a pitch letter that focuses on why your business deserves the funds you are requesting.
Business Funding: Planning Matters
Understanding your industry and planning for potential fluctuations you may face is a key element of running your business, and this planning should include your anticipated needs for new capital and building an emergency fund for unforeseen needs.
Make sure you are mentally and financially prepared for it: if you are completely ready or working with financial partners who understand your business, who can make funding decisions quickly, and who can adjust repayment terms (or equity) according to your requirements, you will find it much easier to ensure that your unique venture gets the fuel it needs, exactly when it needs it.
Building a business is an incredible journey, after all. Who wants to run out of fuel halfway?
Frequently Asked Questions About Business Funding
What Does Business Funding Mean?
Business funding is when an entrepreneur secures external capital to support business needs. Business funding can come from traditional sources like bank loans and investors, as well as unconventional sources like crowdfunding.
What Are the Types of Business Funding?
Debt financing: involves borrowing from a specific lender and repaying it over a period of time with interest. Equity financing: involves raising funds by selling a portion of ownership in the company to investors. Crowdfunding: involves raising money from a large number of people, typically online, to finance a project or business.
What Is the Purpose of Business Funding?
Business funding is used to address seasonal gaps, survive an unexpected downturn, tackle growth and development challenges, and cover necessary repair or equipment purchase costs.
How to
Getting Funding to Start a Business?
You can obtain funding to start a business through a variety of sources, including traditional bank loans, Small Business Administration (SBA) loans, online lenders, venture capital, angel investors, and government grants.
Source: https://www.shopify.com/blog/business-financing
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