There are two main types of businesses: those who rely solely on their personal finances (self-funded) and those who seek outside sources of capital. The latter type of business requires some form of external finance, and several options are available depending on your requirements. Each has its pros and cons, so it pays to review them before acting. Let’s look through some of the most common approaches!
Crowdfunding has become one of the fastest growing forms of financing available today, which involves raising money from multiple individuals who agree to invest in a business idea. The main advantage of crowdfunding is that it allows entrepreneurs to raise funds quickly and cheaply. Entrepreneurs can reach out directly to potential customers and ask them to invest money into their business, which helps to build trust between the entrepreneur and their market Crowdfunding platforms such as Kickstarter also provide entrepreneurs with access to capital at lower costs than traditional sources. However, there are some disadvantages to this funding method. Crowdfunding is still seen as relatively new and therefore lacks credibility among potential customers.
Also called a private investor or seed investor, an angel investor is someone with high net worth who offers financial backing, often in exchange for some form of ownership in the company. Securing an angel investor can be a fantastic opportunity for entrepreneurs, as these individuals come with capital, mentorship, connections, and advice. However, angel investors also come with some risks. Angels usually invest only $25k-$100k at a time, which means that you need to be able to attract multiple investors to fund your company. Angels typically invest at higher valuations than venture capitalists, which means they may be less willing to fund smaller companies, plus they tend to focus on early-stage investments.
Venture Capital (VC)
Venture capital is a form of private equity that funds startups and early-stage emerging companies that may be risky but could offer high returns with significant growth. VCs invest in start-ups at early stages where entrepreneurs have less experience and knowledge about how to run a business, and who may have trouble securing other sources of funding. Like the other options on this list, this approach also comes with its share of disadvantages. VCs typically require a large stake in the company, which means that they often demand board seats and control over strategic decisions, which means founders must give up some control over their company.
Equity financing raises capital through the sale of shares, or ownership in the company, to fill a short or long-term financial need. It’s a more extreme option, where you’re giving up part ownership of the company to raise funds, but it can work well for early-stage startups. However, equity funding has some disadvantages such as dilution, which means that each round of financing reduces the amount of ownership held by existing shareholders. The other disadvantage is that when raising capital from outside sources, entrepreneurs must disclose information about their business plans and financials. This disclosure requirement may make it harder to raise money from angel investors who want to remain anonymous.
Business Loans or Lines of Credit
Small business owners are often hesitant about borrowing money from banks or credit unions for their businesses. However, there are many benefits to getting a business loan, including access to capital, flexible repayment options, tax breaks, and retaining ownership of the company! Small business loans are designed specifically for small businesses and entrepreneurs who want to fund their growth. The most common types of business loans include term loans (also known as revolving credit), which allow you to borrow money at a fixed interest rate for a set period, and a business line of credit, which allows a borrower to draw down funds based on his or her current needs.
Loans or lines of credit can help you pay for things like equipment, inventory, and advertising costs. If you’re not sure where to start, here are four proven lenders who work with small businesses just like yours every day!
Lendthrive offers fixed rate business loans up to $150K in as fast as 24 hours. With low fixed rates and flexible terms, small businesses can secure the financial freedom to flourish, even in a recession.
Since 1977, Charter Capital has delivered a smarter approach to equipment financing. With commercial equipment loans and leases ranging from $10,000 to $1,000,000, this family-owned business offers four decades of accumulated knowledge and experience.
Funding Circle offers fast, affordable loan programs with a simple online process and funding in as little as 48 hours. Whether you need to hire new staff, expand your business operations, or grow your product line, a loan from Funding Circle can help!
At AVANA Capital, they support local economies through loans to entrepreneurs who create jobs, bolster communities, and contribute to the social good, their goal to empower clients with capital to finance their own growth. Get to know their borrowing options here: https://avanacapital.com/borrowing/
Choosing the correct type of funding source will depend on your company’s stage of development, goals, and financial situation, but any of these five methods could very well be the key to securing your company’s successful future!