Every step in starting and growing your business involves learning, experimentation, and exploring different options. Small business funding is no different. Finding the right funding options for your business starts with understanding what’s available to you. And at different times and circumstances, the perfect small business funding solution may vary.
Learn about how to know when you need funding, how much to ask for, the equity vs. debt decision, and the primary types of small business financing options.
After this guide, you’ll be prepared to head out into the big world of small business funding and make the choices that are going to help take your small business to the next level.
When to Start Looking for Funding for Your Small Business
Ask a small business owner how they knew they needed funding for their company, and they’ll probably say something like, “I just knew.” It’s usually pretty clear to a small business owner when their company is bursting at the seams or when they simply don’t have the money they need to accomplish something. These can include any of the following:
Hiring more staff
Adding additional branches or locations to your business
Buying more inventory
Buying more equipment
Refinancing old debt that’s become too expensive
Working capital for paying rent, covering payroll, etc.
Knowing How Much Small Business Funding You Need
Whatever reason you need the money, it can be tempting, particularly if you have a brand new startup, to ask for as much money from investors or lenders as you think you can possibly get. However, this is not a good approach because money is never free (unless someone gives your business a monetary gift). Investors expect a return on their money, and lenders will expect you to pay them back with interest.
So, it’s as important not to ask for too much, as it is not to ask for too little.
The best way to know how much funding you need is to constantly keep tabs on how your business is performing. Either on your own or with help from an accountant, do a forecast every quarter estimating where your business will be from a revenue and profit standpoint three months, six months, even a year into the future. That way, you can predict when you need funding and can estimate how much you’ll need.
The amount of money you should ask for depends a lot on these specifics—however, there are three questions you should ask yourself to determine your small business funding “ask”:
What do I plan to use the money for? (be very specific—e.g. hiring two new employees, launching a paid marketing campaign, opening a new shop, etc.)
How much return can I get from this business use? (e.g. how much revenue and profit might the new paid marketing campaign generate?)
What business expenses, including debt and interest payments, do I already have?
The Two Main Types of Small Business Funding Options: Debt vs. Equity
Answering these three questions should help you figure out how much you much you need, whether you ultimately use debt financing, raise money from investors, or a different funding model. The next decision you’ll be faced with is the best way to fund your small business—and your two main options will be debt financing and equity financing.
Debt Financing Small Business Funding
Debt financing is a way to fund your business by borrowing money. With debt financing, a lender gives you a loan, and you pay them back over time with interest. The lender could be a bank, an alternative lender, or even a family member or friend.
For the average small business, debt financing is easier, quicker, and more practical. There’s a barrier to entry to venture capital—investors typically only do multi-million dollar deals and expect a big return on investment. Plus, you can often secure this type of small business funding online. Unless you have a business that’s going to experience exponential growth in the first few years, your company probably isn’t a good candidate for equity funding.
Equity Financing Small Business Funding
Equity financing is a way to raise funds by selling ownership in your company. In exchange for money from investors, you must give them a portion of ownership and control in your business. The investors may be angel investors, venture capitalists, or even a family member or friend.
Using equity financing has benefits, particularly the experience and mentorship that the investor brings. But there’s one big drawback that often makes it a no-go for small business owners—financing through equity isn’t a one-and-done transaction. With this type of business funding, you’re committing to a long-term relationship with an investor who has a serious interest in the success or failure of your business. Ceding some ownership and influence over the company goes hand in hand with equity financing, and if that’s not something you’re ready for, opt for debt financing.
Choosing Which Type of Funding You Need
Once you’ve reached this fork in the road during your search for small business funding, a few factors will come into play when deciding whether to seek debt or equity funding for your small business.
Some factors to think about when choosing between debt financing and equity financing:
Your industry
Certain industries fare better than others with equity financing. For example, tech companies, financial companies, and healthcare companies are often successful with equity financing because they promise good returns for investors.
Your network
Another thing to consider is your network of personal connections. The more people you know, the easier it is to get an “in” with an influential investor, who in turn might bring other investors with them.
Amount of funding you need
Investors typically transact in multi-million dollar deals, making equity financing ideal for startups. More mature companies that just need, say, some extra working capital, are better off going with debt financing.
Your timeframe
The faster you need funding, the more you should lean towards debt financing. While getting a traditional bank loan can be a very slow process, alternative lenders can get you a loan in just 1 or 2 days, sometimes even the same day. If you need business funding today, then online debt financing will be your best bet.
How much control you want to maintain
This last one is super important. When you use equity financing, you sell ownership in your business in exchange for an investor’s financial support. As part-owners, investors can exert control over day-to-day business activities, which limits your independence.
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