Understanding Your Options
At some point, most businesses, regardless of size, will need more capital than they have readily available. The reasons vary - from covering a short-term gap, like paying salaries before having the income to cover them, to longer term interruptions, like building a new facility or starting a new product line.
According to the
2016 Small Business Credit Survey, the most common way businesses cope with this shortage is by funding it themselves. Roughly 76% of business owners surveyed used personal funds to bridge the gap: however, that isn’t always the best solution. Also, of those surveyed, 44% said they’d made a late payment, and 43% said they’d downsized in 2016.
For some businesses, self-financing may be the right option, but for others, there could be a better choice. Understanding the different types of business financing available can help you find the best financing for your specific situation.
Financing Options to Help You Reach Your Business Goals
There are three primary methods for acquiring capital.
Debt Financing involves securing a loan from a bank or other financial lender
Equity Financing involves selling ownership in your business in exchange for the capital
Alternative Financing involves working with non-traditional financing sources - not banks or stock or bond markets
Debt financing, or traditional bank financing, is the process whereby your business receives a loan from a financial institution. In return, you promise the lender you’ll repay the money within a certain period of time and with interest. Here are five examples of the traditional bank financing available to business owners:
Instead of adding more debt to your business portfolio, equity financing allows you to exchange a percentage of ownership in your company for financing. This financing comes from investors and not a financial institution. These investors, also called angel investors or venture capitalists, tend to look for companies with high growth potential.
In the past several years, additional funding channels have emerged outside of the debt and equity sources. These can be useful for individuals who may have difficulty acquiring funding from more traditional sources.
Crowdfunding. Pools small amounts of money from different investors. There are three common types of crowdfunding:
Donation- and rewards-based crowdfunding. Provides investors money without the expectation of any financial compensation. Rewards-based crowdfunding provides some benefit in lieu of a financial return, such as early access to a new product
Peer-to-peer and peer-to-business lending. Anonymously connects borrowers with multiple lenders. The lenders receive interest in return for their investments
Equity crowdfunding. Provides investors with a stake in the company in return for their investment
Personal Savings/Friend or Family Loan. Sometimes this is the fastest way to secure funding. It is important to spell out the loan terms completely, so all involved have the same understanding of the repayment plan.
Online Marketplace Lending. Allows one or more investors to make loans directly or indirectly to small businesses while evaluating a borrower’s creditworthiness. Online marketplace lending typically involves installment loans with terms similar to traditional bank loans.
Identifying the Best Financing Option for Your Business Situation
Understanding your needs and the considerations behind them can help you identify the best option for your business. It’s important to have a clear vision of why you need the money, a realistic idea of the amount you need, and the knowledge of approximately how quickly you’ll be able to repay the debt. While the right amount of financing can help grow your business, too much money with large repayment requirements can set you back.
Different needs and opportunities require different kinds of financing. Thinking thoughtfully and strategically about the financial needs of your business before you look for funding will help you find the source that best matches your needs and goals.DIS-398*-DIS