Financing a small business could be considered as one of the vital aspects of every business. Raising capital for business sometimes is a hard nut to crack for most business owners and entrepreneurs, as many are not aware of the various options to explore in other to financially kick-start their businesses.
Although, when it comes to financing a business most people primarily think about getting loans from the banks, without considering other safer options that can be explored. To help you find the best financing option for your next business idea or existing business, we’ve compiled this guide to help you get started.
1. Small Business Loan
When it comes to small business loans it is usually not so easy for some business owners to obtain and this may be a result of inadequate knowledge and proper credit facilities etc. There are government loan schemes, banks, some FINTECH companies, and other private sectors as the case may be that offer business loans to business owners who are looking for finance to either expand or start their business. A good example of a government body that offers small business loans is Bank of Industry (BOI).
Obtaining loans from a bank can be seen as the normal financing route and involves setting up a meeting with local banks especially the ones that you already do business with and then speak to them about business loan service. So, if they offer such service for their customers they will tell you the necessary steps to undergo in other to get the loan. This process of getting a loan from the bank until the time of reimbursement might probably take weeks or months depending on the bank. You may also want to consider getting a loan from some online lending platforms.
Self-financing is probably the easiest way to fund your business. It is expected that before you start a business to have some money set out for that business before looking out for other methods to get finance for the business. Using your personal finance is the safest and wisest way to start a company. Although one challenging issue with this method is that you will be limited to the money you have.
A very good thing about self-funding or self-financing is that you retain complete control over the business but you also take on all the risks yourself.
3. Business Grants
There are a lot of organizations that offer grants to small business owners to finance their businesses. And of course, grants are not to be paid back. There are many grants available for different categories of people and there are some that are just for specific types of businesses.
Getting a business grant may not be as easy as it sounds and so you have to devote time to it and make a continuous effort to find the one that works for you.
Crowdfunding is typically a method of raising small amounts of funds or finance from a large number of people. These people are not investors and so do not expect a return on investment of their money or receive a share of ownership in the business venture.
Instead, crowdfunders as part of their financial contribution to the business expect to get a gift that may come in for the product that you plan to sell or having a meeting with the business owner. The risk in crowdfunding is very minimal for business owners. And again you alone are in full control of your business, but if peradventure your plan for the business fails, you are under no obligation to repay your crowdfunders.
5. Venture Capital or Angel Investors
Venture capital is a type of financing provided by investors to small businesses or start-ups companies who have promising growth potentials. It usually comes from well-off investors, investment banks and any other financial institutions. However, any business that is looking to go with this method should be aware that venture capital does not always take a monetary form; it can also be provided in the form of technical or managerial expertise.
You must know that venture capitalist invests capital in return for equity, rather than running into debt, in other words, its a loan and they also take higher risks in exchange for potentially higher returns. To a small extent, they sometimes want to have a seat on the board of directors.
Angel investors, on the other hand, invest in small business companies by providing capital for start-up or expansion. These investors typically lookout for a higher rate of return on investment than would be given by more traditional investments and angel investors expect to get 20 to 25 percent of their initial investment or more. Whether you want to go for angel investors or venture capitalists, both are good options to explore only if you can meet up with their requirements.
6. Raise Funds From Family & Friends
A lot of entrepreneurs have raised capital for their businesses by getting friends and some family members to invest in their business. When turning to friends and family members for business capital, you must be careful not to jeopardize your financial future or relationships. Every business comes with risk and yours is not an exception so, endeavor to also mention the risk involved in the business to them as there are chances that the money might be lost. So they also prepare for the outcome. However, you should properly structure your business and know if you are offering them equity or its just a loan.
In as much as equity investments from friends and family may be a good idea, you need to carefully tread with caution. Ensure to get a lawyer to draft a legal agreement. You should ask them to only invest the money that they can afford to lose.
As a small business owner, there are lots of ways to finance a business but the aforementioned methods are the top ways that can successfully work for your business. Nevertheless, while all of the above ways of financing a small business are great options, you need to carefully put into consideration the nature and size of your business before resolving to any of them.