As a business owner, one of the largest concerns you’ll have is obtaining the funds necessary to start or grow your business. You can have the greatest product or innovation in the world, but without proper funding or consistent cash flow, it can be difficult to make your business a success. Although many entrepreneurs seek a traditional bank loan when their business needs funding, there are other options to consider as well. This is good news for those business owners who may have been denied a business loan, or who don’t yet have enough business credit history to apply for one.
Ultimately, the best choice for funding your business will be determined by your business’s financial situation, your business needs, and your comfort level. It’s also important to keep in mind that some financing options can come with more risk than others.
Let’s take a closer look at some of the different funding available to small business owners:
Business Loans
A business loan from a bank or credit union is one of the most common financing options for small businesses, and it’s usually the one business owners explore first. Many banks offer loans that are backed by the Small Business Administration, a government agency which offers a variety of programs and resources for small businesses. Being approved for a business loan can provide you with the cash you need to open up a new location, buy inventory or equipment, and more. Traditional business loans often have 1 to 5 year repayment terms and give you a predictable monthly payment you can work into your budget.
If you have an established business and good credit, you may also be able to qualify for a business line of credit that you can draw from on a rolling basis. Lines of credits give you more flexible repayment options and do not charge interest on money you haven't borrowed yet.
If your business is just starting out, you may have a difficult time being approved for a business loan. When financial institutions evaluate businesses for lending purposes, they often like to see one to three years of successful business history to be confident in your ability to repay the loan. In some cases, start-ups can get around these hurdles by putting up collateral or offering a personal guarantee for the loan.
Self-funding
If you have built up substantial personal savings, aside from retirement accounts or a college fund, you may be able to get your business off the ground by investing in your own venture. Another option is to use personal lines of credit, personal loans or credit cards for initial business expenses, however it’s important to understand that any money you borrow personally puts you on the hook for repayment, and not your business.
If you have friends or family members who believe in you, they might also be willing to help you get your plan up and running. Keep in mind though that this should only be done with mutually agreed upon terms. Before borrowing money from loved ones, you should also discuss what will happen if the business were to fail or if you were to default on the loan. You don’t want to ruin a relationship because financial expectations were not laid out ahead of time.
Crowdfunding
Many businesses now use crowdfunding to raise money prior to a business launch. In basic terms, crowdfunding involves a large number of people contributing a small amount of money in order to fund a business venture.
Getting a crowdfunding campaign up and running can be a lot of work. Although there are crowdfunding sites to get help get you started, a well-thought out plan and marketing strategy is essential to getting people interested and investing in your business. You’ll likely need to spend time, and in some cases even money, on creating a website, social media, promotional videos and other marketing collateral to raise awareness about your business and make your plea for funds.
In some crowdfunding campaigns, businesses essentially seek donations. Another option is to pre-sell your products and services at a low price point, which could be a greater incentive and produce better results than a donation-only campaign. A third option is investment crowdfunding, also referred to as equity crowdfunding. Under this model, investors provide funds to your business in exchange for a potential return if and when the business starts earning a profit. There are regulations around investment crowdfunding, and risks to consider as well, for both the investor and the entrepreneur.
If you’re interested in crowdfunding, it is extremely important to review all of the terms associated with the platform you’ll be using. In some cases, you may only be allowed to withdraw money if you meet your stated goals, and it’s also common for the crowdfunding platform to take a percentage of any funds raised.
Angel Investors
Angel investors are high-net-worth individuals who lend money in return for a percentage of the business. The “sharks” from the popular ABC show Shark Tank are a well-known example of angel investors. They often have experience running or owning business ventures and many have part-ownership in other businesses as well. Along with buying a stake in your business, they typically offer business expertise and guidance that can help your company grow quickly.
To receive funding from angel investors, a business owner must typically go through a difficult evaluation process to prove themselves and their business to the investor. An angel investor will want to know why they should invest in your company and they’ll expect to be presented with a well laid out plan. If your business if already up and running, you’ll likely need to provide past financial statements and growth reports. An angel investor may also require changes to your business or business plan before they’re willing to invest.
Finding an angel investor involves work as well. In most cases you’ll need to be referred to one, so networking is critical if this is a funding option you’d like to explore.
Venture Capital
Funding from a venture capitalist works similarly to partnering with angel investors. The difference between a venture capitalist and an angel investor is that a venture capitalist (or venture capital firm) invests in your business using money pooled together from corporations, pension funds, and investment companies, while an angel investor invests their own money. Venture capital is similar to mutual fund investors that invest in new businesses in exchange for a percentage of ownership. These types of investors typically also offer business expertise. As is the case with angel investors, you may have to give up some control of your business when utilizing venture capital. If venture capital sounds like something you’d like to explore, you’ll need to do some research and start networking in order to find a venture capitalist willing to hear your business pitch.
Deciding Factors for Which Option is Best for You
When choosing a funding option for your business, you should first determine how much money you need, how quickly you need it, and how and when you can realistically pay it back. You should also evaluate whether you’d consider giving up control of your business, and if so, how much control you’d be willing to relinquish. If you aren't willing to give up any control, traditional loans or lines of credit might be your best fit.
No matter how you choose to fund your business, it is important to read any fine print and fully understand all of the terms associated with your agreement. Don’t rush into something just because you need cash fast.
If you’d like to start a conversation about financing for your Massachusetts or Rhode Island small business, get in touch with BankFive’s Business Banking Team today. We’re committed to helping local small businesses succeed, and would love to hear from you!
Ultimately, the best choice for funding your business will be determined by your business’s financial situation, your business needs, and your comfort level. It’s also important to keep in mind that some financing options can come with more risk than others.
Let’s take a closer look at some of the different funding available to small business owners:
Business Loans
A business loan from a bank or credit union is one of the most common financing options for small businesses, and it’s usually the one business owners explore first. Many banks offer loans that are backed by the Small Business Administration, a government agency which offers a variety of programs and resources for small businesses. Being approved for a business loan can provide you with the cash you need to open up a new location, buy inventory or equipment, and more. Traditional business loans often have 1 to 5 year repayment terms and give you a predictable monthly payment you can work into your budget.
If you have an established business and good credit, you may also be able to qualify for a business line of credit that you can draw from on a rolling basis. Lines of credits give you more flexible repayment options and do not charge interest on money you haven't borrowed yet.
If your business is just starting out, you may have a difficult time being approved for a business loan. When financial institutions evaluate businesses for lending purposes, they often like to see one to three years of successful business history to be confident in your ability to repay the loan. In some cases, start-ups can get around these hurdles by putting up collateral or offering a personal guarantee for the loan.
Self-funding
If you have built up substantial personal savings, aside from retirement accounts or a college fund, you may be able to get your business off the ground by investing in your own venture. Another option is to use personal lines of credit, personal loans or credit cards for initial business expenses, however it’s important to understand that any money you borrow personally puts you on the hook for repayment, and not your business.
If you have friends or family members who believe in you, they might also be willing to help you get your plan up and running. Keep in mind though that this should only be done with mutually agreed upon terms. Before borrowing money from loved ones, you should also discuss what will happen if the business were to fail or if you were to default on the loan. You don’t want to ruin a relationship because financial expectations were not laid out ahead of time.
Crowdfunding
Many businesses now use crowdfunding to raise money prior to a business launch. In basic terms, crowdfunding involves a large number of people contributing a small amount of money in order to fund a business venture.
Getting a crowdfunding campaign up and running can be a lot of work. Although there are crowdfunding sites to get help get you started, a well-thought out plan and marketing strategy is essential to getting people interested and investing in your business. You’ll likely need to spend time, and in some cases even money, on creating a website, social media, promotional videos and other marketing collateral to raise awareness about your business and make your plea for funds.
In some crowdfunding campaigns, businesses essentially seek donations. Another option is to pre-sell your products and services at a low price point, which could be a greater incentive and produce better results than a donation-only campaign. A third option is investment crowdfunding, also referred to as equity crowdfunding. Under this model, investors provide funds to your business in exchange for a potential return if and when the business starts earning a profit. There are regulations around investment crowdfunding, and risks to consider as well, for both the investor and the entrepreneur.
If you’re interested in crowdfunding, it is extremely important to review all of the terms associated with the platform you’ll be using. In some cases, you may only be allowed to withdraw money if you meet your stated goals, and it’s also common for the crowdfunding platform to take a percentage of any funds raised.
Angel Investors
Angel investors are high-net-worth individuals who lend money in return for a percentage of the business. The “sharks” from the popular ABC show Shark Tank are a well-known example of angel investors. They often have experience running or owning business ventures and many have part-ownership in other businesses as well. Along with buying a stake in your business, they typically offer business expertise and guidance that can help your company grow quickly.
To receive funding from angel investors, a business owner must typically go through a difficult evaluation process to prove themselves and their business to the investor. An angel investor will want to know why they should invest in your company and they’ll expect to be presented with a well laid out plan. If your business if already up and running, you’ll likely need to provide past financial statements and growth reports. An angel investor may also require changes to your business or business plan before they’re willing to invest.
Finding an angel investor involves work as well. In most cases you’ll need to be referred to one, so networking is critical if this is a funding option you’d like to explore.
Venture Capital
Funding from a venture capitalist works similarly to partnering with angel investors. The difference between a venture capitalist and an angel investor is that a venture capitalist (or venture capital firm) invests in your business using money pooled together from corporations, pension funds, and investment companies, while an angel investor invests their own money. Venture capital is similar to mutual fund investors that invest in new businesses in exchange for a percentage of ownership. These types of investors typically also offer business expertise. As is the case with angel investors, you may have to give up some control of your business when utilizing venture capital. If venture capital sounds like something you’d like to explore, you’ll need to do some research and start networking in order to find a venture capitalist willing to hear your business pitch.
Deciding Factors for Which Option is Best for You
When choosing a funding option for your business, you should first determine how much money you need, how quickly you need it, and how and when you can realistically pay it back. You should also evaluate whether you’d consider giving up control of your business, and if so, how much control you’d be willing to relinquish. If you aren't willing to give up any control, traditional loans or lines of credit might be your best fit.
No matter how you choose to fund your business, it is important to read any fine print and fully understand all of the terms associated with your agreement. Don’t rush into something just because you need cash fast.
If you’d like to start a conversation about financing for your Massachusetts or Rhode Island small business, get in touch with BankFive’s Business Banking Team today. We’re committed to helping local small businesses succeed, and would love to hear from you!