There are plenty of things to think about when running a business. Perhaps the most stressful and demanding thing involves business finances. Without money, running a business is impossible. You need finance in order to start a business, grow it and make it succeed.
So, how can you generate finance for business? There are, actually, a number of ways to go about the subject and below are some strategies you should consider.
Two basic finance options
First, let’s examine the basics of business financing. There are essentially two options you could go with: debt and equity. All financing options consist either debt or equity, with some consisting a hybrid combination of the two. Neither debt nor equity is bad – the best option always depends on your business’ circumstance and needs.
So, what are debt and equity in a nutshell? Debt can be a loan or a line of credit that provides your business with a set amount of money. You will then need to repay the money within a specific period of time. In order to obtain the debt, you often have to secure it with the help of an asset. This means that if you can’t repay, the lender will take away the asset. The asset is often something such as property or specific equipment. However, loans can also be unsecured.
On the other hand, equity is receiving money in exchange for a part of your business. It means selling a stake in your business and receiving money without any need to repay the sum. However, the person receiving equity will often get a say in how the business is run and a stake in the profits.
4 common methods of financing a business
The above is about the basic of business financing. But what about the different methods that utilise the above elements? Here are some of the most common financing options for businesses to use.
Bootstrapping is about using your own money and resources in order to launch and run a business. It is often about tapping into your savings and launching the business with just the bare minimum. As you start generating money, you put it back to the business in order to grow more.
During bootstrapping, businesses don’t have big plans. You might launch a landing site, create a minimum viable product and market your business with cost-effective marketing strategies.
You may search for different ways to cut down on overall monthly expenses by not purchasing lot of equipment or furniture at same time and watching out for sale on Staples or Office Depot. Coupons could be another resort to get products at affordable price – for example, Printed.com promo codes to get good deals on business cards. Bootstrapping is rather popular but definitely a tricky tactic.
2. Friends and family
You could also turn to your immediate friends and family for help. Often, this method involves equity financing – friends and family give you money and you give them a slice of your business. However, you can also make it into a business loan. In both cases, the terms can be more favourable than with a bank or professional investor.
Financing your business with friends and family is rather complicated. It can affect the relationships you have with them and it can all end up in tears. It’s important to understand what the options mean and to ensure everyone understands the terms.
3. Business loan and line of credit from a bank
Banks have not been as active in handing out business loans ever since the financial crash in 2008. However, a business loan or a line of credit from a bank is still a popular option. The bank will give your business money and you’ll repay it over time. It’s straightforward and simple.
However, your business needs to already have a stable financial record in order to attract a business loan – this is definitely a tricky option for new business. It can work with traditional businesses with good market conditions but it’s not a suitable option for riskier businesses – banks simply won’t lend you money.
4. Venture capital and angel investors
For the riskier businesses, venture capital and angel investors are a good alternative. This is a popular financing strategy, especially in terms of technology startups. The wealthy individuals and professional investment bodies will provide you capital in exchange for equity. It can generate a hefty sum of money but you do have to slice out a rather big piece of the cake.
Getting an angel or VC to invest won’t be a walk in the park. According to some estimates, only 1% to 2% of businesses that pitch to angels and VCs end up getting an investment. You definitely need to be investment ready before you go down this route.
Other finance options
The above are the most popular financing options for the business. But you can also apply for grants from governmental and non-governmental trade bodies. There are also startup competitions that could help you win cash prizes and use this money to finance the business.
As you can see, there are plenty of options when it comes to financing your business. No strategy is better than the other on its own – it all depends on how much money you need, what you need it for and what kind of situation your business is in currently. Knowing these aspects will help you choose the right option from the above list.