Are you thinking about how to get funding for a business? These days, there is no shortage of options. This guide provides the basics on how to get the best business funding for your company.
How to Get Business Funding
You can get funding for a business in several ways. However, the right option depends on what type of business you have or plan to start, as well as your specific circumstances. For instance, if you already own a company, you could consider crowdfunding. However, if you want to launch a small business, then a Small Business Administration (SBA) loan may be the best option. Below you will find the most common ways of funding a business and their interest rates.
- SBA loans: 2.28% to 10.25%
- Small business grants: 0%
- Bank loans: 4% to 12%
- Angel investors: 0%
- Crowdfunding: 0%
- Support from family or friends: 0%
- Free business grants: 0%
- Bootstrapping: 0%
- Credit cards and microloans: 13% to 32%
- SBA Loans
If you plan to launch a startup, you can apply for a small business loan. Usually, these are easier to qualify for than bank loans. They don’t require much collateral and come with convenient repayment schedules.
The main disadvantage of SBA loans is that they are smaller sums. It may also take some time to qualify for them. Moreover, you may be required to provide a personal guarantee.
- Small Business Grants
Help for Small Business Owners: As a small business owner, you may require some extra funding. You may be able to get financial help through small business grants. These grants are specifically designed for startups and other small businesses.
Free Grants for Small Businesses: Free business grants don’t have to be repaid, so any company welcomes them. On the other hand, the grants can be challenging to qualify for. The competition is tough, and the criteria are high. Also, they don’t constitute large amounts of money, and receiving the funds may be a lengthy process.
- Bank Loans
A bank loan is a way to fund any business. Most loans have very low, fixed interest rates and overall costs. The repayment is usually made every month, and you will have a personal banker to discuss your matters with. Another benefit of bank loans is that they can be used for many purposes.
On the downside, it may be challenging to qualify for a bank loan. You need to have an excellent credit score and credit history to receive one. Another disadvantage is that many loans require collateral. Moreover, the application process can take longer than other alternatives.
- Angel Investors
Angel investors are investors who provide capital for startups. They usually give businesses substantial amounts of money. Additionally, angel investors have vast networks, business experience, and a lot of knowledge. Therefore, they can help your company in numerous ways.
However, angel investors receive ownership in the business. That is the price you pay for the financial support. This means that you will no longer be the sole owner of the company. Of course, partial ownership also implies that you can’t make all the decisions by yourself.
Crowdfunding involves turning to multiple investors. Each investor provides a smaller amount, but the total funds gained are usually substantial. One of the main advantages is that it is easier to find investors who can give small amounts. Another advantage is that the crowdfunding platforms have made funds more accessible. Also, you get to maintain full control of your business. Crowdfunding is a good option both for startups and established companies.
The main downside of crowdfunding is that it can be more complicated than it appears. Writing a pitch and presenting it on a platform doesn’t guarantee any funds. You actually have to work hard to gain a reasonable amount of money. To an extent, this is due to that the market is saturated. There are already a lot of companies that are trying out crowdfunding.
- Support From Family or Friends
Many entrepreneurs are able to launch or maintain businesses, because they get financial help from family or friends. This is a good option as it doesn’t involve paying interest on the loan. You also get to maintain full control of your business (unless you agree otherwise).
Despite the advantages, borrowing money is an easy way to damage a relationship. For example, you may not be able to make repayments as fast as you think. Another potential problem is a change in the relationship. For example, the lender may criticize your spending habits. They may question why you spend money on, say dining, or holidays, while you haven’t fully repaid your debt.
If you have savings, a 401(k), or other assets, you could fund your startup with those resources. This is referred to as bootstrapping. Since you provide the required capital, there is no debt involved. Simultaneously, you will keep full ownership of the company.
The disadvantages include potentially running out of funds. While you may have sufficient capital in the beginning, business development and growth require a lot of resources. Also, investors can provide contacts, know-how, and other tools which may improve your business. Therefore, you may not have the same support as a company that has investors.
- Credit Cards or Microloans
If all else fails, you can also apply for a business credit card or microloan. They can provide the funds you need without the hassle of lengthy applications. Generally speaking, credit cards and microloans have very high costs. Therefore, they are not ideal for business funding. Furthermore, both come with strict payment schedules that allow for very little flexibility. If you make only the minimum payments, you can quickly find yourself with what seems like insurmountable debt. This can also weaken your credit score.
Frequently Asked Questions
The Bottom Line
So, which option would be best for your company? Whatever business plans you may have, there is certainly an alternative for you. We recommend that you take your time and weigh up the options carefully before making a decision. All of them can be excellent; it’s just a matter of finding the right one for you!