Every once in a while, thousands of people start businesses. One common thing these people need is money to get the company off the ground. Raising money is also required to cover any other corporate expenses. In this article, we will address the simplest ways to finance your business.
Before we discuss the simple ways to finance a business, let’s first examine the two basic ways to finance a business.
The Basics – Debt vs Equity:
In-debt financing, you lend money from an outside source, promising to return the money with particular interest by a set date shortly. Most people consider taking loans for debt financing.
The loans are, however, secured with assets. If you don’t pay the loan by any chance, the creditor can confiscate the asset. Commonly used assets are cars or the title of a piece of property.
Equity financing means someone or a company putting money into the business in exchange for some ownership percentage. In simple terms, it’s also referred to as putting up for sale a part of your business. The advantage of equity financing is that you don’t need to refund the money received.
All financing solutions pertain to either debt or equity financing. Some consist of a hybrid combination of both equity and debt financing. Either way, they both have their pros and cons. Find whichever works best for you according to your requirements and circumstances.
Now let’s look at simple ways to finance a business.
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Simple Ways to Finance A Business:
One of the best ways to finance your business is to use your own money. You can save money for a while, and once it accumulates to your desired amount, you can use this money to fund your business. Saving up is a conventional, safe way to start a business or company.
One setback in saving money to fund a business is the amount of money you can save limits you. Some people venturing into the business world take cash from their homes- it could be retirement benefits or insurance policies. If the business fails, the high chances are you incur significant losses. You can lose your house, retirement and insurance.
To avoid the occurrence of such losses, consult a financial advisor.
Raising Money from Your Friends and Families:
Many entrepreneurs get family and friends to invest in them. You can ask your friends and family to either buy a share of your business or lend you a loan. In this way of raising money, you risk jeopardizing meaningful relationships in case the company fails. You first have to ask yourself if you are willing to risk your relationships for the sake of financing your business.
To avoid losing meaningful relationships, consider supplying assessments with clear evidence when you will refund the money. Offer a business plan, and don’t be afraid to mention the risks involved with them investing in your business.
Credit cards enable you to borrow money up to a set limit. The money should be repaid, in most cases, usually after a month. Using credit cards is a perfect way to fund a business but be very careful with the interest charged if you don’t pay by the due date. There are also penalties for late payment.
Securing a Bank Loan:
To convince a bank to lend you a loan, you have to offer them a perfect business plan. The bank expects you to have a clean credit rating and experience in starting a business. You are also required to demonstrate the ability to repay from revenues.
When you portray an excellent record, the bank gives you a set amount of money that you are supposed to repay after several years. The number of years you should repay after depends on your agreement with the bank. This method of financing is limited to very few businesses that have had experience in other companies.
Attracting an Angel Investor:
An angel investor is a person that provides capital to start a business. Angel investors make an equity investment in your business. These people also offer guidance on how you can run the business. The angel investor needs to see your business potential growth.
You are also required to provide an exit strategy whereby the angel investor can recover their investment if the business fails.
Consider a Microloan Program:
One of the most well-known microloan programs is SBA (Small Business Administration). An SBA loan program provides up to $50000 to small and upcoming businesses. Even so, it would be best if you still met specific criteria to gain from this microloan financing.
For you to benefit from SBA, you ought not to have other funding options. You also need to have a strong credit history.
Financing a business can be a challenge. But the simple financing techniques we have listed above will positively influence your choice. There are also other financing methods you can consider. Make sure to choose a way that effectively works for you.
In case of any challenges, consult a financial advisor.