Eight Most Common Methods of Financing Your Business

By  //  March 1, 2020

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Every year, thousands of people start a business and it is thrilling until they are all met with the same question: How will I fund it? Fortunately, there is no shortage of methods to resort to, or lenders to ask for help.

There are many avenues but there are 8 methods, in particular, that should stand out. However, simply picking one without exploring the rest will be very remiss of an entrepreneur. 

Since the financing options are many, your choice should fall back on your business’s needs. So, make sure you are aware of those needs. Begin by understanding the strengths and weaknesses of each method of finance, as well as how they work, before plunging in. With that said, here is all you need to know:

1. Savings

The first most common method people turn to is making use of their savings. Drawing cash from your savings, also known as bootstrapping, will have you use your existing resources to give you that initial push forward.

The obvious advantage is that your business will not be indebted, sparing you the difficulty of making monthly payments. Then again, you will be risking your personal cash, which, if the business does not work, will have you out of money and a job. 

2. Friends & Family

Asking friends and family for help is second nature and when you are looking to finance your business, taking this avenue is advisable.

This is because the rates they will give you as lenders will be incontestable, as they will likely be interest-free. They will also offer payment flexibility. But it is a loan and not a giveaway. However, a failure to pay back the loan could injure your relationship, so do your homework and make sure the prospects are clear. 

3. Credit Cards

The conveniences of a credit card make for the popularity of this finance method. You can use them just as you would, by making purchases and paying them off later.

Depending on the type of card, you can be rewarded with points or cash back. You can use your personal card, however, acquiring a business card will be easier for when you file your taxes. It is important to do your research and understand what each card will be offering. The fees can be enormous, so only look to use the card when it is absolutely necessary.

4. Business Loans & Lines of Credit

The most conventional of all common methods is simply taking a loan. There are many options to choose from, like short-term, long-term loans, and equipment financing. It may be harder for new businesses to qualify for loans, which is not the case with online lenders.

Whether you get a loan or use a line of credit, managing your payments can start getting out of hand. It is advisable that you start applying the latest money management techniques and have all your finances on one platform.

To do so, you can read more here about how to design experience and consolidation of your finances is both important for easy money management. This will allow you to have a better relationship with your money by taking care of all your financial needs in one place.

5. SBA Microloan Program

SBA, Small Business Administration, microloans are very common for small business needs. The microloan program offers as much as $50,000, which is ideal for businesses that do not need much and do not want to pay high-interest rates. It also does not take more than 6 years to pay back. 

6. Angel Investors

If you are looking to finance your business without needing to borrow, Angel Investors and Venture Capital are perfect for doing so. Typically, they invest in startups and demand an equity stake in return, which is the only downside to employing this method. You will be giving up control and ownership, but remain debtless. 

7. Crowdfunding 

Crowdfunding is the means of raising money from a group of individuals. There are many platforms to choose from, though they are mostly focused on helping startups.

A lot of the time the funding will be reward-based. This means that instead of paying back the investors, you can reward them with a new product you are working on. Though, this is not the case for peer-to-peer lending, which is a Crowdfunding platform. You will need to pay them back, just as you would with a loan.

8. Factoring

Factoring is a finance method that is typical for startups. It works on giving you a loan that leverages your outstanding accounts receivables.

The factoring company will give you a loan based on your receivable’s value. Payments will differ, as some will choose to collect the money directly, while others will ask you to pay as invoices are paid.

This is a method you might want to consider if you are not able to qualify for other types of loans since it can be expensive, due to the fee’s lenders will charge. 

Regardless of the method you choose, when looking into financing prospects it is important to carry out thorough research and understand all that needs understanding.

After doing so, you will need to look at the method that best suits your needs. But seeing as money management can get out of hand, apply the latest techniques as they will surely help