10 Financial Sources for Your Small Business

Financial Sources for Your Small Business

However, there is a reason why not everybody becomes an entrepreneur. Among other things, one of the biggest challenges every (future) entrepreneur faces is the financial aspect of their business. It’s not that simple to just invest a lot of money into something that may or may not work. And make it through the first year, with all the expenses, taxes and necessary purchases while waiting for the right clients to show up. In short, it is sometimes very hard to get that amount of money to be sure you’ll manage to have a successful startup. If you need fresh ideas on financial resources, here are the best options possible.

1. Help from your inner circle

Your family and friends are the ones you usually turn to for help. Well, this may not be different but it is something to think about really carefully.

Let’s look at the good side first. You won’t have to worry about some deadline and about high-interest rates, which means a lot for a new entrepreneur. Secondly, you probably won’t have much trouble in borrowing money from them because people close to you probably think of you as trustworthy.

On the other hand, you need to be clear with them that just because they lent you money, it doesn’t mean they get to meddle with your business. Another, bigger issue here is that money can get between friends and family members. Sometimes it can get really nasty if it turns out your business isn’t thriving as you were expecting and you find yourself unable to pay back what you owe.

2. Apply for government grants

Most of the countries offer government grants to specific businesses for a specific purpose. Before you move on to other sources, check out if you are eligible for a government loan. You need to meet all the requirements to obtain it, so make sure you fulfill all of them so that you don’t waste time if you’re not a good candidate. In most cases, government grants are given for expanding a business, which means there is some working capital. However, you should check if it’s possible to get a grant for starting a company. In some countries, such as the US, there are several grant programs offered. While some of them help you expand your existing business, others are given to help you purchase or build a new office or buy the necessary equipment. There are also microloans with these grants that are intended for buying supplies and equipment. Make sure to look into this option before you move on to something else.

3. Short-term and medium-term business loans

Business loans are great if you need money fast and you are pretty confident you will be able to pay them back in the given time. However, both of these options are viable only if you have a good credit score, which is something you need to check or work on.

A short-term loan is excellent if you need money really fast and you are ready to pay it back within a year. The amount is usually between $2,000 and $500,000, depending on what you need it for. The funds are usually available to you within a single day. In case you need the money for inventory or payroll, this would be a perfect option. The whole process can be done through a bank or an online lender, with not too many requirements that need to be met.

On the other hand, you also have the option of medium-term business loans. They also range between $5,000 and $500,000 but it will take you more time to fund (usually about a week or so). In most cases, this type of a business loan is used for purchasing equipment. And you will also be given 1-5 years to pay it back.

4. Peer-to-peer lending

In case you don’t qualify for a regular loan, this is a good option for you. Peer-to-peer lending involves a platform you need to register on. The platform serves for matching the appropriate lenders and borrowers. You will be matched to specific landers based on your credit score. In case you seem like a risk, you will probably be offered higher interest rates.

The good thing is that you will always be offered several options so that you can choose the one that suits you best. Another benefit is that opting for P2P lending means you don’t have to deal with a middleman (usually a bank). So, things go much faster and smoother.

5. Crowdfunding

In case you feel very confident about your business idea, crowdfunding may be a great option. It would involve a lot of hard work, including setting up a campaign and creating a detailed proposal. You need to be very precise about how you think your business idea can help people and improve their lives. In other words, you need to convince lenders their money will be well-invested. There are several crowdfunding platforms, including Kickstarter and Indiegogo, where you will present your business idea.

Another thing to be aware of is that there are several types of crowdfunding. The first one is charity-based crowdfunding, which means you’ll get money without ever needing to pay it back. In case you are able to give products or at least subscription to your potential lenders when your business is up and running, then it is a reward-based crowdfunding. In case you offer the investors a share of your company, then it is equity-based crowdfunding. The basic P2P lending would be the situation where you borrow money from investors but are obliged to pay the money back.

6. Apply for a personal loan

In case of a personal loan, you will have to see different banks, online lenders and credit unions. However, the trick is that banks take your credit score as the most important factor in deciding whether you get the loan and how high your interest rate will be. In case your credit score is not great, some banks may reject you but don’t get discouraged. Luckily, there are options for bad credit history, too. On some online platforms, even candidates with a low credit score can get a loan under different conditions. Just keep in mind that there are ways to improve your credit score but don’t get discouraged if you don’t have the time for it. Lastly, keep in mind that your personal assets serve as collateral if you are not able to pay the money back in time.

7. Equipment loans

It is clear from the start what types of loans are these. They are used for buying the equipment necessary for your business. This includes machinery and vehicles, too. Regarding the fact that the equipment serves as collateral, it won’t be too difficult to qualify for this type of loan. In other words, it’s a good option for startups. The only thing is that you will have to wait between one and three weeks to get the funds, which can go as high as a million dollars.

8. Invoice factoring and financing

This may not be useful to startups but you should be aware of this option nevertheless. If you are faced with a financial crisis, usually a low cash flow, you could consider invoice factoring. For example, if your client is late with their payment, you have the option to sell the invoice to a factoring company. Just keep in mind you won’t receive the full amount in this case. On the other hand, invoice financing does not involve selling your invoices but it acts as a revolving line of credit.

9. Angel investors

Angel investors are actually people who are willing to invest in a good business idea in exchange for equity. Even though the process is pretty straight-forward, these people are pretty hard to find. The other problem is that they get a lot of proposals but they opt for only a few. Basically, you need an excellent business plan to attract their attention and make them want to invest in your idea.

10. Use your personal savings

Finally, some businesses don’t need a lot of initial capital to start. In case you have been saving up for a couple of years, this could be the opportunity to invest your savings into your own business. On the bright side, there are no interests and deadlines – just you and your determination. If you have some money aside, think whether your future business is worth investing the money.

Final words

Financing a small business isn’t as easy as one may think. However, the good thing is that there are various options and possible sources of financing. The important thing here is to carefully choose the right option for your specific situation.