Securing funding for a business is among the core challenges of being an entrepreneur. Unless your enterprise has the balance sheet of Google or Microsoft, sooner or later you will need capital infusions to sustain your operations. In fact, lots of large companies occasionally seek capital injections to stay afloat and meet short-term obligations.
As a small business owner, it’s critical that you obtain capital from the right funding models. Take money from the wrong source and you risk getting saddled with excessive fees and high-interest rates that can cripple your business’ growth for many years. Or worse, they may cause you to lose a part of your business should you fail to honor the terms in the repayment contract. Here are 6 alternate sources of funding for your small business.
1. Credit Cards
Credit card financing can be an attractive option if you have both good business credit and a high credit limit. Credit cards also, generally, have lower interest rates than other financing options. In addition, you don’t stand to lose any equity since you don’t have to put up any business stock as collateral to receive funding.
However, their ease of use makes them very easy to abuse through constant borrowing, racking up huge balances, and missing payments. These will result in high fees and add an extra burden to the business’ finances. As such they should only be used by responsible cardholders.
2. Venture Capitalists
Is your business taking off and you don’t have the funds to sustain the ever-increasing demand? Then it’s time you considered approaching venture capitalists to supply the much-needed capital for expansion. Venture capitalists provide funding in return for a certain percentage of ownership in the business which they plan to sell back to you a few years down the line once they recover their initial investment plus profits.
You’ll need to know your business’ valuation in order to pitch to venture capitalists who invest in similar businesses. You can determine your business’ worth by using Biz Equity’s valuation software.
3. Friends and Family
There are a lot of pros to friends and family contributing to support your business. In most cases, there is no contract spelling out the terms of the loan, interest, and payments. Collateral is also not required and the debt can at times be forgiven. A solid business plan highlighting the business’ strengths, management, and financial projections will make it easier to receive financial help.
Factoring involves selling a business’ accounts receivable at a discount to a third party. Accounts receivable represent the amount of money a business expects to receive for sales made on credit, usually in a period of less than one year. The factor buys and pays the value of the invoice less their fees and commission. It’s an excellent way to increase cash flow to a business if a significant portion of the sales is in the form of account receivable.
Crowdfunding is when you receive small donations from many organizations, businesses, and individuals to fund your business. In exchange for the capital, companies can offer equity or rewards to the donors as a gesture of appreciation. There are a variety of crowdfunding platforms online. Make sure you read the legally binding terms and conditions to fully understand what is required from you and what to expect from the crowdfunding platform.
6. P2P Lending
Peer-to-peer lending involves using a specialized online platform that acts as an intermediary to connect to a lender. The potential borrower completes an application form which is assessed by the platform. They determine the credit rating and risk of the applicant and assign an appropriate interest rate. The company that manages the platform charges a fee for provided services.