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Which type of business financing do I need? 

You have a business idea or a new idea to increase your business’ revenue but how should you finance it? Business financing refers to the funding a business needs to run. This funding can help the business to start, run or expand depending where you are in the business journey. Today we will look at the different funding options and the pros and cons of them.

Business financing

Business financing can be divided into two broad categories:

  • Equity funding: In equity funding, you give a portion of your business for the funds. This means that someone owns a part of your business and also they may have decision-making capabilities if it is part of the loan agreement. This fund is risky for the investors as they may not get their money back if your business is unsuccessful.
  • Debt funding: This type of funding is loan which you need to pay back. There may be interest costs included and you will need to pay back the loan even if your business fails. The benefit of this type of funding is that you retain 100% ownership of your business.

Let us take a look at the different ways to finance your business:

Different ways to finance your business

1. Bootstrap your business

Bootstrapping refers to using your own finance to fund your business. This could be savings which you invest into your business or you could take some of the profits of your business and reinvest them into expanding your business. The benefit is that you don’t need to pay off a loan or give a portion of your business away. The drawback is that should your business go through tough times you may not have the money to survive especially if you have invested in a long-term project which has yet to pay dividends.

2. Lending from friends and family

This may be an easy way to get money to start, run or expand your business but it also comes with risk. When asking family or friends to invest in your business, you need to treat it as a business deal and draw up a contract with the conditions with which the money is lent. Is it an equity loan where they own a part of the business and hope to be paid dividends when the business is making a profit or is it an debit loan where you need to pay the loan back even if you potentially lose the business? It is crucial to have a clear written contract which states the responsibilities of each partner in the agreement.

3. Angel investors

These investors understand the risk involved of investing in start-ups and consider the managerial staff and industry before making an investment. They will also want part of your business for the money they invest. Some angel investors may also take on a mentoring role which would be beneficial especially if you are new to the business ownership game.

4. Loans

There are a variety of loans available from many different types of establishments but the loans can be defined in two broad categories. The first is secured loans. This is where a lender accepts an asset from the borrower that is security that the loan will be paid. This type of loan has a lower interest rate because the risk is low. The disadvantage is if you fail to pay the loan back they will seize the asset which you put up as security. The second is unsecured loans. These loans are not tied to any assets. They are a higher risk for the lender so the interest rate may be higher. The other point to consider that you can’t lend more than the income you receive in your business. This type of loan is good for an emergency expense.

5. Venture capital

This type of funding is for businesses with a high growth potential. The investors offer funding, mentorship and may introduce you to their network. The downside of this type of funding is that the investors want a large chunk of your business because of the amount of funding they are willing to put into your business.

6. Grants

The government offers various ways to assist small business. They offer financing options for various types of SMBs and they offer mentorships to help young SMBs become profitable.

7. Crowdfunding

Do you have a strong following? Are you good at marketing your business idea? Then crowdfunding might be for you. In a rewards-based platform, you can offer a reward for different donations. These could be from meet the business owner to having their name on your website. The disadvantage of crowdfunding is that if you don’t reach your target by the allotted time you will not receive the money you need.

By reviewing these seven funding options you can find the one which may best suit your position and build a business that goes from strength to strength.

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