In business, the adage “You need to spend money to make money” often rings true. Once you’ve identified a market demand, developed a business idea, and created a value proposition, you next need to acquire business funding. You can’t establish a business, after all, without spending money. And we’re not talking about little money here as often. The most expensive part of the business is the beginning.
Initially, the expenses can be left and right, like acquiring a space for your offices or shops, manufacturing your products, raw materials, manpower, etc. There’s an abundance of expenses that you need to meet if you want to start your business. Thankfully, there are several ways to finance a business. From bootstrapping to applying for loans, there are many options you can choose from for your startup.
However, you need to know that these options have pros and cons, so you might want to research them first. In this article, we will delve into the general gist of each of the most popular options entrepreneurs like you usually go for when establishing a business. Let’s start.
This is usually the most recommended method when you ask a lot of veteran entrepreneurs. But as we discussed earlier, establishing a business is not cheap. Unless you have a significant amount of savings that you won’t use for anything else, you can use your money to finance your business.
The main advantage of bootstrapping is that you don’t have to owe anyone anything. For example, if you want a loan, you’ll pay it back with interest. Or if you want to go for an investor, you’ll have to give up some of the equity of your business for them to give you financing.
If you believe that your business project can garner a lot of fans, then crowdfunding is perhaps the best way to do it in terms of financing. However, most of the time, you’ll have to spend money on advertising if you want more people to hear about your business project. One good example of a project that utilizes this funding method is indie game developers.
The gaming community often champions indie game companies that make their IPs, which is why the gaming industry thrives. Indie developers would pitch their projects on popular crowdfunding platforms like Patreon, Indiegogo, and Kickstarter. They would advertise their games, and if the gaming community loved the idea, they would donate in exchange for an early copy.
If your credit score is great, you can choose a business credit card. Business credit cards offer much convenience for entrepreneurs looking to finance a small business. This is a way for them to get the money and pay it off later. Not only that, but there are also a lot of credit card issuers out there willing to be paid back through points, cashback, and even mileage.
However, you need to be wary about the differences between a personal credit card and a business one. If you use a personal credit card or personal installment loans for business expenses, you’ll likely have difficulty accounting and filing your taxes. The same could happen if you use business credit cards or business loans for personal purposes.
That said, you should only use the business credit card appropriately. But before you agree to sign for a credit card, you need to read the fine print first. It’s an important habit to get into.
If you don’t want to spend too much money, one group of people you can go to are investors. Two of the most common ones are angel investors and venture capitalists. Angel investors are high-net-worth individuals looking to fund small businesses to take off and get some of their equity. Once satisfied, they will let you buy back their equity and look for another business proposition to fund.
Venture capitalists, on the other hand, are a group of people who pool their investing money to fund small business projects. The main advantage of getting funding from investors is that you don’t have to pay back the money once your business didn’t take off. This way, when your business idea fails, you won’t be left with hundreds of dollars of debt, which can ruin you financially.
But, of course, there’s a catch. They’re not doing this for free since, in exchange for funding, you have to give them a significant portion of equity. That means they own a part of your company, which lets them have a say on important matters.
In hindsight, it’s a pretty good deal since you don’t have to pay back their money. However, giving up some of your equity is a thought that you have to be comfortable with. If it comforts you, some investors offer money and other things like managerial expertise, office spaces, and even marketing.
Well, of course, you’ll see loans in this list. You might ask yourself, “Investors are pretty neat, so how isn’t it the most popular way of financing a business?” Well, first of all, finding them isn’t easy. Second, they have pretty steep requirements for giving people financing. So, instead, the most popular way of financing a business is through a loan.
To be fair, being approved for a business loan isn’t easy. You also have to have a good business presentation, credit score, business plan, etc. But if you compare the requirements between investors and banks, the latter is much easier to approve. Relatively, at least. Fortunately, though, more and more banks and lenders are offering business loans for small businesses, giving entrepreneurs looking to fund a small business a chance to have their own business.
And there you have it. These are some of the most common ways of financing a business in today’s industry. These options have pros and cons that you must know about before agreeing on any of their terms, so you should always research and read the fine print before you sign anything. Just make sure you pick the best suitable for you and your type of business. With all that said, good luck.