Every business owner is familiar with the old adage, “It takes money to make money.” With so many alternatives for acquiring those much-needed funds, you can find yourself dazed and confused when it comes to figuring out which is the right way to bankroll your business.
Whether you’re considering taking a loan, partnering with an investor, or tapping into your savings, look at the benefits and downsides of your financing options before deciding which to pursue.
If you have good credit, consider taking out a traditional business loan. Long-term loans have the advantage of smaller monthly payments, but it’s important to calculate how much interest you’re paying over the life of the loan versus a shorter-term. Also remember that in order to maintain your high credit score you will need to make those payments in full and on-time.
If your credit is less than stellar and you think you’ll be turned down for an unsecured loan, look into finding a cosigner—someone to accept responsibility for making the payments should you fail to do so. A cosigner can help you qualify more easily, but they’re putting themselves at risk on your behalf, so it’s not something to request lightly.
Another option should you not qualify for a loan is to offer up collateral. Typically, valuable property such as the business owner’s home, the business’ inventory, or equipment can serve as collateral. These items will be sold by the bank to repay the balance of the loan if you fail to keep up with the payments. While this option also speeds up the lending process, picture your life without these assets should you be unable to fulfill your commitment, and be realistic about this option.
By sacrificing some equity, business owners can often find a partner who’s willing to invest in their venture. While it’s hard to give up control over your business, if your new ally has both funds and experience in your field, it can be a win-win.
Keep in mind, however, this investor may come in with his or her own ideas about which direction your company should take, and in exchange for financing, you may have to heed those requests.
This DIY method can keep you from sacrificing any equity or writing any IOUs. While that sounds great, it can be daunting to deplete your hard-earned savings account. If you choose to go this route, be sure to set enough aside in the event of an emergency.
Bootstrapping, as it’s referred to in the startup arena, is how many businesses get off the ground. Because you’re not beholden to any investors, this alternative offers the flexibility and the highly-desirable autonomy some entrepreneurs covet.
Using your own money also proves to outside investors or lenders that you’ve got some skin in the game. Should you choose to pursue a partner or a lender down the line, they’ll see you’ve been willing to go all-in for the sake of your venture.
There may be thousands of people out there who’d love to support your business, and thanks to rewards-based crowdfunding, you now have access to them—and their wallets. Crowdfunding through online platforms like Kickstarter and Indiegogo allows entrepreneurs to connect with individuals who are eager to back the next big idea. Supporters can pledge at varying levels and, in return, receive rewards that have a tie-in to the business.
Sites like Fundable allow you to offer an equity stake in your business in exchange for funding from investors. Under the equity-based crowdfunding model, startups create a public profile that provides a company overview, plus a private profile that contains business documents and deal terms. Accredited investors are then granted access to review these private profiles. Investors can then review the company’s terms and invest in the company in exchange for a percentage of the business.
Another crowdfunding option is an online debt-based marketplace, like Lending Club, which connects lenders and borrowers. Peer-to-peer lending can offer lower interest rates while investors enjoy attractive returns.
Friends and Family
This group is made up of your personal cheerleaders who want to see you and your business succeed. Accepting financial support from them can provide a much-needed boost, but just as you would with a traditional investor, it’s a good idea to put everything in writing from the get-go. A promissory note, establishing the terms and conditions of the loan, can go a long way towards eliminating any confusion or hard feelings down the line. It’s also a good idea to discuss the risk and the likelihood of failure with your friends and family before accepting their investments.
Also, if your nearest and dearest believe in your idea, it’s a great first step toward convincing others to get behind your endeavor should you attempt to secure outside investors. You can also ask your backers if they have any connections they’re willing to contact on your behalf to spread the word or solicit additional support. In the long run, putting your network to work for you can be beneficial for all parties.
On the flip side, friends and family might not have the right relationships or impetus to connect you with your target audience the way a venture capitalist would. Weigh the importance of capital versus connections before deciding if this is the right move for your company.
Microloans allow individuals to borrow relatively small amounts of money, usually less than $50,000, to help start or grow small businesses. Sole proprietorships and businesses with a small number of employees—such as online businesses or those that operate out of a home or a storefront—often find it very difficult to secure traditional bank financing and make good candidates for microloans.
Microlenders tend to look at the whole picture when deciding to lend, rather than focusing solely on numbers, rendering them a bit more flexible than a bank when it comes to lending criteria. In addition to the loan, some non-profit lenders also provide training and education, making this option that much more appealing.
Starting a business or expanding an existing one can be a daunting task—especially when it comes to securing much-needed capital. Consider your long-term strategy to see whether debt or equity financing makes sense for your business.
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