When starting a small business, it is highly likely that you will have to secure funding through finance. The concept of finance can seem complex and overwhelming but is often or not a key component of running a successful business. This helpful guide breaks down top methods of financing a business to help understand what is suitable for you.
Business Loan
Taking out a business loan is a common form of debt financing – when you will have to pay back what you have borrowed. Opting for a business loan can seem attractive as it can provide you with a lump sum of money which you can use freely, meaning the bank who offered the loan has no ownership over your business. However, the eligibility criteria for obtaining a bank loan are stringent and depends on your personal credit score. In times of financial distress, such as the coronavirus pandemic, it might be harder to secure a bank loan. Further, when investing in a business idea there is always the prospect of risk. With start-ups there is a lack of uncertainty and making a monthly repayment may not always be doable for some businesses.
Overdrafts
Not far from business loans, debt financing can also come in the form of overdrafts. These are beneficial for managing cash flow as they can offer a high degree of flexibility, are easy and quick to apply for, and can be used for short-term day-to-day funding. Overdrafts, however, are subject to the stipulations of banks, meaning interest rates can often vary, firms can often ask you to pay back your overdraft at any time without warning, and may charge if you exceed your borrowing amount.
Angel Investors
Finance in the form of an angel investor occurs when an individual provides a business owner with usually a generous amount of money in return for equity in the company. This appears as a very attractive offer to the business owner as there is no cost to the business to the business and the money does not have to be repaid. However, you as a business owner will lose equity and may be subject to the angel investor administrating a degree of control. Despite the loss of control, this may fair well as business owners are fuelled with expertise and knowledge.
Crowdfunding
Start-ups will often utilise social media and the internet to market their business idea and attract potential investors by offering incentives to investors. Crowdfunding can reach a larger audience which potentially increases the probability of receiving finance. However, if funding fails, potential investors are not required to pay anything, yet will still obtain insights about another person’s business.
Risk is innate in business start-ups and each form of financing has its own pros and cons. It is important to contextualise your business plan perhaps with a specialist advisor and weigh up the negatives and positives in relation to what you believe will bring high success.
