How to Finance Your Small Business (2021 Update)
Read about the many ways you can finance your small business from taking out a loan to venture capital in this article.
There’s no shortage of financing options available when starting a business, but too much choice means people often settle for funding that’s unsuitable for their business model. Choosing the wrong financing option for your business can lead to difficult situations, such as feuds between investors, debt and can also take up a considerable amount of time. To help you find the best solution for your business, here’s a range of options that can help you finance your small business.
1. Debt Financing
As one of the most popular ways to finance your small business, the majority of new small businesses are funded with debt financing. This is predominately via bank loans or bonds. Business loans are generally the first financing option considered, with the typical provision of a loan coming with a repayment plan attached to an interest rate. Business loans will require some sort of collateral that the bank can confiscate and sell if payments are not made on time, while a professional business plan will immensely assist lenders in determining your financial situation in further detail.
- No equity sacrifice
- The most readily available finance option
- Requires you to pay interest
- Could potentially also require personal collateral (e.g house, car, etc)
- Does not provide the networking opportunities or business value of other financing options
There’s a range of programs designed to get your small business up and flourishing. The applications are notoriously long and competition is fierce, but it’s hard for any of us to overlook “free money”. These types of grants are more often than not only available for registered companies.
- Free money
- Connection and also collaborative opportunities
- Generally provides access to experienced industry advisors
- Difficult to obtain – also highly competitive
- Generally require complete transparency on how the funds are used
3. Angel Investors
“Angels” live up to their name – they are typically patient with their investments and provide valuable relationships in addition to funding. Angels typically seek smaller, more risky deals in promising early-stage businesses. Further, they often invest in groups.
- Generally provide more flexible business agreements
- Add value to the business through experience and networking
- Active involvement from Angels can cause problems
- Often seek a considerable stake in the business
4. Venture Capitalists
VC’s predominately fund businesses beyond the startup phase that are showing signs of considerable growth. They typically seek to get their money and profits out as soon as possible, and as a result have very high standards of the types of businesses they bring on.
- Have deep pockets if you need more to grow
- Provide great insight and networking opportunities
- Very selective of who they fund
- Requires you to share control of your business
- Only applicable to companies
5. Crowd Funding
Crowd funding is rapidly becoming a viable financing solution, with equity crowdfunding platforms allowing businesses to raise money by selling off a percentage of their business. Businesses that receive considerable crowd funding can usually attribute this to smart marketing and also a well thought-out campaign strategy.
- Large exposure can result in considerable fundraising sums
- Greater freedom to set own commitments
- Free publicity and marketing for your business
- Increased transparency into your business
- Fundraising could cost you a considerable stake
6. Friends and Family
An investment from friends and family generally involves small amounts of funding free of the hassles of debt financing. When considering this sort of investment it’s important to stay professional and to treat it as a business relationship, and remember that every business has risks. You should always be careful of who you do business with, and this is especially true when you want to bring in people to help finance your small business from your personal life.
- Available much faster than other finance options
- Favourable terms
- Generally a limited source of funding
- Could put a strain on your personal relationships
7. Strategic Entity Investors
Strategic investors are attracted to businesses that complement their own business objectives, and the benefit of such investors is the ability to leverage their business to help grow yours. However, this also means that they could place restrictions on how you operate (particularly if you’re a competitor), so it’s very important to determine what they bring to the relationship besides money.
- Allows you to leverage off their previous success
- Generally more focused on holistic success than a return
- Can force dramatic business changes to satisfy the relationship
- May also restrict who you are able to deal with (e.g competitors)
Choosing the right finance for your business
At some stage you’ll need to make a choice, so it’s worth doing your homework when looking at financing options for small businesses. Consider a few options before throwing all of your eggs in one basket – if a financing option seems too complicated or risky it’s worth seeing what else is available for your business. If you have further questions around financing your business, it may be worth getting in touch with a business lawyer.
Dominic is the CEO of Lawpath, dedicating his days to making legal easier, faster and more accessible to businesses. Dominic is a recognised thought-leader in Australian legal disruption, and was recognised as a winner of the 2015 Australian Legal Innovation Index.