7 Basics of Financing a Small Business – The Complete Guide
The pandemic grounded several SMEs, and the surviving ones are trying to make a comeback. SMEs account for over three-quarters of global businesses, driving half of global employment. That makes them the heartbeat of any economy.
Yet, they faced funding issues even before the pandemic. Now, they are facing the toughest challenge due to the pandemic and its ripple effects. If you’re a small business owner wondering how to get working capital to expand your venture, we will help you.
In this article, you will learn the financing basics for your small business. Let’s dive in.
- Know the Amount of Funding You Need
There is no one-size-fits-all business funding. Every startup business has different and unique needs. Framing your business vision will help you picture your future financial performance. You should also learn about Development Finance and how to manage it.
However, you must know your current financial status to understand your deficit. If you’ve been operating for some time, getting the detailed financial situation of your business is vital. It may include details like
- Past, recent, and current loans.
- Debts incurred
- Your bank account balances
- Credit card accounts,
- Investment accounts
- Leases etc.
But, if you’re a new startup about to set up shop, you’ll only need to know what you require to meet your goals.
The bottom line is: know what you have and the amount of funding needed to take your business to the next level.
After getting the funding figure, the next step is to seek funding sources.
- Apply for a Small Business Loan
One of the surest funding sources is loans, preferably from alternative lenders. However, there are factors to consider as a small business owner when applying for a business loan.
- Hidden costs. You should know all your costs upfront to avoid running into debt or financial problems. Your lending partner should be transparent on all charges and interest rates upfront.
- Processing time. The faster, the better. You need all the leverage to compete in the crowded market. The faster you get your business loans processed, the more convenient it will be for you.
- Excellent customer support. Businesses operate in a dynamic environment. And you may need to adapt to changes as they present themselves. Having supportive customer service from the lending partner will be crucial.
Most institutional lenders, including banks, have little accommodation for the above conditions. But, you can easily get a small business loan from alternative lenders with less restrictive conditions. It makes it possible to get a business loan when you need it the most without restricting you on how or when to use it. Also, your loan is processed faster with less collateral.
Some alternative lenders even offer a business loan calculator to know your costs upfront. So, you will have more control over your business financing terms without hidden charges.
How to Apply for a Small Business Loan
But, how do you apply for a small business loan? In most cases, it takes a few steps, as listed below
- Know the amount you’re applying for and review your credit history.
- Evaluate your loan options-term loans, business line of credit, etc.
- Find a suitable lender for your unique needs.
- Get the relevant documents.
- Finalize your application.
Some of these steps do not apply to online banks or lending institutions, especially those offering short-term loans.
It takes less than 10 minutes to check your eligibility and apply for a business loan. But, a good credit history still plays a critical role in the loan application.
So, what happens if you have a bad credit history? Can you get bad credit loans? Yes, alternative lenders provide loans to people and businesses with bad credit histories. They can extend loans through term loans. Having said that, banks do not offer bad credit loans.
Regardless of your credit history, you can get a business loan to expand your business.
- Do Self Funding
You can also fund your business through personal financial resources. Also known as bootstrapping, it can help you raise money to cover your funding. It can also complement your small business loan.
Self-funding can take many forms:
- Leveraging your family and friends’ money for working capital.
- Use personal savings accounts.
- You can also use savings from other businesses you own if applicable.
- Leverage your 401(k).
- Personal loans.
But self-funding comes with its risks that are worth appraising to avoid its impact. Although it gives commendable control to your small business, here are the risks:
- Spending more than you can afford will pile up financial stress.
- Using part or all your retirement savings can negatively affect your retirement plans.
- You may expose yourself to penalties and fees for early withdrawals on your retirement money.
We recommend that you engage with your accountant for professional discretion.
- Apply for Small Business Grant
You can also leverage business grants. They are funds extended to businesses in need of expansion. Their main benefits include;
- They are not paid back and attract no interest.
- You’ll not need to offer your company’s equity in return.
But, most business grants are geared towards specific missions or goals. You can search for business grants in your local and regional areas.
- Seek Equity Financing
Equity financing involves giving up a share of your business for financing. Also, investors funding you through equity may want a seat at the management or board of your business. So, you’ll need to offer your business ownership and an active management role.
But, your business must have high-growth potential to attract equity financing.
- Have a Line of Credit
A line of credit can come in handy if you want to cover up for limited inventory purchases. It allows you to borrow money when in need up to a certain preset limit. So, you can use a business line of credit when you need to keep your business cash flow running. It is vital for certain short-term needs.
Crowdfunding is another popular funding option for small businesses. It involves raising business funds from a large pool of people known as crowdfunders.
With crowdfunding, you don’t need to give your business ownership to crowdfunders. Also, they do not need financial returns for their contribution. Crowdfunders only need a gift or special perks, e.g., sample product, credits, etc.
So, crowdfunding is a low-risk funding method you can leverage to expand your small business. But, research on the best crowdfunding platform for your business needs.
More than ever, we need SMEs to help us push through the post-pandemic recession. But, your small business needs firm funding and support before extending its help to the rest of the economy.
You can bootstrap, get a small business loan, crowdfund, etc., to revitalize and grow your business.
But, be cautious when diverting your personal funds, especially retirement savings, to expand your business. Tapping on it early may attract hefty penalties and mess up your early retirement plans. Professional discretion from your accountant is necessary to make an informed and balanced decision.