Small businesses have many difficulties to deal with. and it’s always the hardest during the first five years. Some of the reasons for that is because they don’t usually have the kind of expertise, marketing infrastructure, or resources that larger competitors have. That’s why you need to know what financing options for your small business are out there.
Large, established corporations have many resources you won’t, but they also usually don’t have access to the same financing options as you. Some business owners simply don’t know where to look to get financing, and you don’t want to be one of them.
Here are four main sources of financing for small businesses.
1. Small Business Loans
Business loans have long been the primary source of company financing, and there are many different options available.
Long-term loans are offered by most banks, and there are regulated by the Small Business Administration (SBA). This is the most common type of loan out there.
For business owners who have lower credit or only need financing in smaller amounts and for shorter periods, there are alternative micro-loans and lines of credit out there. And when brick and mortar banks don’t have the loan terms you want, online lenders may be a better option.
Basically, you can look into all kinds of loans for many different purposes!
2. Merchant Cash Advances
Another type of financing that you can use if your business makes steady credit card sales is a merchant cash advance. Merchant cash advance loans are really not even loans or lines of credit because they’re structured differently.
According to Lantern Credit: “A merchant cash advance is not actually a loan, but a financing option that allows small businesses (“merchants”) to get a cash advance for business expenses in return for a portion of their future sales or receivables.”
This option is a form of debt financing, but instead of making payments with interest over a period of weeks or months, you simply repay with each future credit card sale. A merchant cash advance isn’t a bad idea if you want financing that doesn’t involve hard deadlines. However, this option could take a chunk out of your cash flow as you’re repaying it.
3. Family, Friends Or Angel Investors
If you’re not able to secure an ideal loan or another debt financing, you could consider getting funding from friends, family, or angel investors.
Friends and family might be the best choices because they may be interested in supporting you as a gift without interfering in management decisions. You could repay them with perks or freebies from your business as a thank you. However, borrowing money from loved ones can also be complicated, so think hard before asking.
Angel investors are another great source of funding. They are investors who usually have deep pockets and want to help you get your start. However, be aware that these investors usually want a large slice of your profits, since they’re also in it to make money. And since they also become part owners, they will usually want a say in how your business is managed.
To learn more about angel investing, read our article 4 Excellent Reasons To Become An Angel Investor.
Crowdfunding is basically another source of financing your business through investors. It’s similar to fundraising through charitable donations. Anyone can pitch in any amount either in an in-person fundraising drive or on a donation website.
It’s a lot less complex than an IPO, and usually, crowdfunding donors don’t purchase actual shares in a business. Instead, you can offer a VIP membership, discounts, or freebies.
If you’re in doubt of which option you should go with, you should talk to a financial planner. Pick a money coach online at Ellevest and you’ll meet with someone who truly wants you to succeed. You’ll walk away from each session with a realistic and actionable plan for your small business!
Ellevest: If you are looking for a tool to invest, check out Ellevest. Ellevest is a digital investment advisor whose algorithms factor in gender differences in pay, career breaks, and lifespan.
Another factor that set's them apart is that they are a goal based investing platform. So you set your goals, and the system tells you how much you should invest to meet it on time.
The best part is that they offer a free goal-based investment plan with no obligations to invest with them.
Whichever form of financing you want is going to be determined by what your long-term business objectives are and how much debt you’re able to take on. You may even want to use multiple sources of financing to ensure your cash flow is constantly replenished. Hopefully, one of these four financing options for your small business will help you get the boost you need as a new entrepreneur!
If you want to learn more about starting your business, read our article 5 Things You Should Do When Starting A Small Business.