You’ve got a big idea, and you want it to change the world. You know that starting a business is a lot of work, but it’s a lot of money, too. Although it’s common to want your startup to pay for itself, the fact remains that you’ll need to pay the bills to keep your business afloat. While you should take care when considering financing for your business, there are plenty of reasons to take advantage of financial solutions. By learning more about your options, you can get the capital you need to achieve your business goals.
Reasons to Consider Financing for Your Business
About three in four startup founders use personal savings to fund the business, according to research from a financial services company. While using your own money has certain benefits, it can create some issues for long-term money management of the business. Relying on your own funds comes interest-free, and you never have to pay it back. On the other hand, when the money is gone, it’s gone.
In a world where about half of all startup businesses fail due to a lack of funding, looking for alternatives can be a matter of survival. You don’t have to rush out and apply for every funding opportunity you can find, but you should take the time to consider your options. Having a plan to provide funding for the crucial aspects of your startup can simplify your path to establishing a viable business.Â
Advantages of Financing Your Business Operations
If you’re still debating whether you should apply for a business loan or other type of financing, you should consider these advantages of business funding:
- Get the capital you need to pay for costly equipment and materials
- Pay yourself, so you can continue to devote your energy to the business
- Pay for contractors and other services that keep the business running
- Manage your cash flow, leveling out the peaks and valleys of the invoice cycle
You can customize the type of financing that you need for a specific situation or project, even for a particular piece of equipment. Within the boundaries of your personal credit and a few other factors, the sky’s the limit in your ability to tailor funding to your business needs.
Financial Solutions for Business Growth
Before you start applying for funding, you should consider the various types. Some require that you make regular payments, while others may take a share of equity or future income. The right one for you depends on your business, financial situation and the reasons for the financing.
Term loans
Term loans are one of the most used types of financing for businesses. The premise is simple: You get a certain amount of money with a set interest rate and payment term. Each month, you make a payment until the loan is paid off. These loans are easy to understand, which makes them appealing to new business owners. Keep in mind, however, that you can’t use the loan to get more money if you need it.
Lines of credit
For businesses that have variable spending needs, a line of credit may make more sense. Lines of credit offer a draw period in which you can take out as much money as you like, up to the stated limit. At the end of this draw period, you shift to repayment. This financing makes a reasonable option for funding needs that extend over time, such as a construction project with ongoing costs over a period of months or years.
Equipment loans
For many capital-intensive businesses, the cost of equipment is the biggest obstacle. You may not want to drain your personal funds buying a piece of equipment that costs hundreds of thousands of dollars. Equipment financing uses the equipment itself as security, which may allow you to get better terms than you would with an unsecured loan. Just remember that you must keep making payments to keep the equipment.
Equity financing
If you want to avoid getting a loan that you’ll have to pay back, you might consider looking for financing from organizations that claim a portion of your business’s equity in payment. You’re probably familiar with the concept of venture capitalists — the organizations that may choose to provide funding based on the general success and promise of your startup. To win these funds, you’ll need to prove that you deserve the money, so you should expect a lot of due diligence before a VC firm makes a decision.
For entrepreneurs who are earlier in the process of starting a business, looking for an angel investor might make a better choice. Unlike venture capitalists, angel investors typically use their own money to help fund a startup. They often don’t put in as much funding, but in return, they can provide helpful advice that can ease the struggles of your business in its early years.
Invoice factoring
The time between the sending of the invoice and receiving payment can wreak havoc on your cash flow, which is why many businesses turn to invoice factoring. Invoice factoring essentially involves selling the invoices to a factoring company that handles receipt of payment. You get a portion of the invoice right away, minus a fee, and you receive the rest of the invoice once payment comes in. This financing works well to help you handle overhead expenses like payroll, while you wait for payment on projects and services.
Merchant cash advances
If you need quick cash, and you don’t have collateral, a merchant cash advance can be a viable short-term financing arrangement. With a merchant cash advance, you get a lump sum of money. In exchange, you promise the lender a portion of your sales receipts until the debt is paid off. These loans are convenient and often easy to get approval, but they can charge high fees for this simplicity.
Crowdfunding
For a business idea that has tons of appeal to the public, crowdfunding can be a great choice. Crowdfunding has become a popular financing vehicle for businesses that can give small-time investors an opportunity to get involved. You’ll usually be expected to set tiers of funding, with promises of goods or services once development and production are complete. Crowdfunding can be ideal when you’re organized, but if you fail to deliver, it can be a public relations nightmare.
Tips to Maximize Financial Benefits for Your Business
While applying for financing can be a great way to manage expenses and promote growth within your business, you should ensure that you make wise decisions. Avoid applying for the first financing opportunities you find. Instead, take time to sort out your options and choose the best one. If you need assistance, seek the advice of a financial advisor with experience working with businesses like yours. A minor investment in financial services, such as advising or private company financial reporting, can ensure that you continue to meet the needs of your business in the years to come.
Getting financing for your business is a big step. With the right choices, you’ll smooth out the uneven parts of your startup’s cash flow without creating too many burdens for you to manage. By considering these options, you can find financing options that provide you with useful capital your business will need to keep growing.
Author bio: Adam Nguyen is Senior Vice President for Donnelley Financial Solutions™, a global financial solutions company. He has many years of experience in the industry and focuses on the company’s financing activities and daily operations.
