Financing Options for Small Businesses
There are many ways to finance a small business. From crowd funding to venture capitalists and even angel investors - read about them all in this article.
There’s no shortage of financing options available when starting a business, but through this breadth of choice people often settle funding that’s unsuitable for their business model. Choosing the wrong financing option for your business can lead to rather tricky situations, such as feuds between investors, power shifts and can also take up a considerable amount of time.
To help you find the best solution for your business we’ve highlighted a range of financing options to consider when the time is right.
Generally speaking, the majority of new small businesses are funded with debt financing, predominately via bank loans or bonds. Business loans are generally the first financing option considered, with the typical provision with 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 require personal collateral (e.g house, car, etc)
- Does not provide the networking opportunities / business value of other financing options
Interested in business loans? Free services such as Loandesk can assist in choosing and introducing you to the most appropriate business loan.
There’s a range of programs designed to get your small business cooking with gas. The applications are notoriously long and competition is fierce, but it’s hard for any of us to overlook “free money”. If you’re interested in seeing what’s available, The Grant Finder is a great resource to discover what type of grants are available in your industry.
- Free money
- Connection and collaborative opportunities
- Generally provides access to experienced industry advisors
- Difficult to obtain – highly competitive
- Generally require complete transparency on how the funds are used
“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, and 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
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
Crowd funding is rapidly becoming a viable financing solution, with equity crowdfunding platforms such as Equitise 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 a well thought-out campaign strategy.
- Large exposure can result in considerable fundraising sums
- Greater freedom to set own commitments
- Increased transparency into your business
- Fundraising could cost you a considerable stake
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!
- Available much faster than other finance options
- Generally a limited source of funding
- Could put great strains on your relationship
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 restrict who you are able to deal with (e.g competitors)
So What’s Best for Me?
At some stage you’ll need to make a choice, so it’s worth doing your homework. 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.
We hope you choose wisely!
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.