If your small business needs money to grow and expand, the best way to do it is through a loan. However, self-funded operations are dangerous because you’re risking your entire business on the venture. It’s difficult to raise money from other sources without a lot of risks. So how do you fund your business? Here are 13 of the top ways to fund your business successfully.
Short-term debt financing. From personal equity and personal loans, here are 13 of the best ways to fund your business with less-risk debt financing. Short-term loans.
First, you may consider funding your small business without a term loan. Short-term loans are among the most common forms of small-business financing you get a lump sum of money and pay it off over time, using interest as the repayment method. There are many short-term loan options available depending on your credit history and income. You can also choose to refinance your existing mortgage to get a lower monthly payment or you can apply for secured debt financing. As an option, you may also look into business lines of credit to fund your future growth.
Second, you may consider debt financing with low-interest mcas or credit cards. Mcas is a type of credit card that has very high-interest rates and fees. While there are a lot of advantages associated with using credit cards, they usually require collateral, which is another burden. If you don’t have collateral, debt financing with credit cards and mcas can be very expensive and hard to secure. It’s not uncommon for people with bad credit to have a hard time getting approved for debt financing, much less financing for a small business.
Third, two other options are often overlooked as one of the best ways of financing your business, and that is asset-based and intangibles financing. Asset-based financing means simply asking for donations, stock, equipment, furniture, and other types of tangible assets from personal funds. This can be a great source of funding because of its low-interest rates and lack of collateral requirements. On the flip side, intangible assets such as patents and copyrights are more difficult to secure funding because they are not tied to any type of tangible property. Intangibles, however, are a much better choice for a small business owner. Here, business owners give the business their patents and exclusive trade secrets so they can protect their technology and other intangible assets.
Regardless of which of these best ways of financing your business is, it’s important to understand that there are some major differences between them. Debt financing typically requires a good chunk of change upfront to obtain a loan; for example, equipment financing requires a vendor advance payment, an installment, or an installment and interest payment. With cash flow-based financing, there is no need for a vendor advance payment or any other sort of money upfront.
Cash flow-based funding can help a new business get started by providing sufficient funding to purchase its equipment, but it does have some disadvantages. In particular, because it is based on cash, it is prone to credit risk – if the company doesn’t pay its debts, the lenders will be left with very little money to provide loans to other potential clients. Additionally, because the interest rates for this kind of funding are generally higher than typical debt financing, the overall amount you need to secure can be much larger. Cash flow-based financing can also result in a higher start-up cost since there are typically more moving parts and detailed documentation that must be provided for the process.
Now that we’ve reviewed the two most common methods for getting funds, we advise against using them to fund your business… For starters, debt funding is inherently unstable, because the terms are based upon how much money is available at the time the funding is requested, so funding options are often changed mid-way due to economic conditions. Cash Flow based funding is also fairly high risk, since the lenders risk losing their entire investment, whereas term loans only require the borrowers to pay the loan off after a specified period and interest rates are usually lower. Finally, the amount you can expect to pay in interest over the life of the loan is significantly higher with cash flow-based funding. Ultimately, we recommend choosing one of the more stable funding strategies, such as business lines of credit.
