Trying to start a business or take one to the next level can be expensive. You might be increasing your staffing, starting a marketing campaign or developing a new product. Self-funding is often recommended, but that isn’t a possibility for everyone.
Getting a business loan from your bank is certainly a possibility, but there are other funding sources available. So before you settle on where to obtain your funding, here are a few tips to keep in mind.
1. Know the difference between debt financing and equity financing
These two terms get thrown around a lot when discussing fundraising. Both are viable options, but they function very differently.
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Debt financing is, at its core, just obtaining funds that you have to eventually pay back in addition to interest. Those funds can come in the form of a bank loan, line of credit or a loan from private investors. It’s generally considered to be a lower-risk, lower-reward strategy for investors. While the borrower is required to pay back the funds, they are not giving up an interest in their business.
With equity financing, on the other hand, the business is not obligated to pay back the money raised. Instead, the lender is given equity in the business. If a company grows by a huge amount and then sells at a massive profit, the lender could see a big payout.
Because equity investors are, well, invested in your success, you can sometimes get assistance apart from funding. Angel investors may offer mentorship or relationship introductions to help their investment pay off. Debt investors are less inclined to do this because they will theoretically get paid whether your business fails or succeeds.
Businesses looking to raise funds are more likely to get them via debt financing, but they will need to pay them back — and then some. With equity financing, a business owner has peace of mind knowing that the raised funds won’t have to be repaid if the business fails. But because that makes this approach riskier for investors, such funding is harder to obtain.
So consider carefully what’s most important to you and your business’ success. If you want to maintain complete control of your company, debt financing might be the better direction to take. If you’re looking to gain business relationships and reduce risks of failure, look into equity financing.
2. Consider crowdfunding as a short-term strategy
Crowdfunding isn’t a new thing, but the internet kicked it into high gear for business funding. When crowdfunding, businesses typically offer special deals or equity in exchange for funding. Kickstarter is probably the most well-known site, but there are many to choose from, so make sure to select the best one for you. You’ll want to select your site based on what compensation you’re offering and whether you want a general or niche-specific platform.
Unlike securing a loan through a bank, there’s a certain amount of marketing required with crowdfunding. Instead of trying to impress a bank manager with numbers and potential profits, you need to pitch something to excite investors.
Before attempting crowdfunding, determine your target audience and which crowdfunding site will be the most visible to that crowd. You’ll also want to consider what you want to offer in return for funds.
Rewards-based compensation is pretty straightforward. If you’re offering equity, though, you can’t just do whatever you want. You will need to comply with state and federal security filing regulations. Not only that, but you’re required to provide details and reports on the health of the business. So before you offer equity, make sure your deal is compliant.
For startups that are developing or rolling out a new product, crowdfunding is a viable option for raising capital. While crowdfunding might be appealing as a short-term strategy, you’ll also want something more reliable for the long term. Taking out a line of credit for when you need a quick funds injection is going to provide reliable cash access for the long term.
3. Pursue grants
Most of the time when you hear about grants, your mind probably goes to education or science. But grants can extend to a variety of activities, including nonprofits, public building upgrades and even small businesses. If you’re a small business or startup, you should investigate whether there are any grants you qualify for.
On a federal level, you can consult resources such as grants.gov. But make sure to also check at your local and state level. Sometimes cities or states will set aside funds to boost local commerce and/or bring new businesses to the area. With states, it’s often industry-specific. For example, Missouri tends to offer a lot of agricultural grants. By comparison, California is more likely to make grants available to tech and research industries.
So if you have a small business, do some research to see whether you satisfy the application requirements for local, state or federal grants. Applying for grants typically requires a great deal of paperwork and tedious documentation. Given that grants do not have to be repaid, however, investing that time in the application process could prove to be worthwhile.
When you need to raise money, it’s tempting to jump on the first funding opportunity that arises. But before you sign on the dotted line, you’ll need to determine whether the way you’re raising money supports your goals. Those goals can be short term or long term, but ultimately they must contribute to the lasting success of your business.
Related content
- Managing Startup Finances: The Fundamentals Entrepreneurs Need to Know
- Three Ways Business Owners Can Evaluate Financial Risk
- Financial Planning for Small Business Owners
- Three Key Financial Management Strategies to Prioritize for Your Business
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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