What Are the Best Methods of Financing a Business?
Opening up your business can be a dream come true, however, to get there you’ll need to make sure you have the means to finance your business. Whether you take a loan from a family member or explore a different avenue, you’ll need cash to cover equipment, operational costs, and more. In this article, we’ll cover several ways you can fund your business and the benefits and downsides of each. Keep reading for a comprehensive overview of each financing method.
What Does Financing a Business Mean?
Financing a business involves coming up with the funds necessary to start your business or invest in different aspects of your business. Whether you’re seeking to remodel a store or open up a second location, you’ll need financing to accomplish each endeavor.
Businesses of all sizes and industries tend to utilize business financing, as many business owners don’t have access to the cash they require on hand. Popular types of financing for business needs include personal savings, family and friends, traditional lenders like banks, revenue-based financing, and more.
How to Finance a Business?
Your unique circumstances might make some financing methods more advantageous than others, while others might have drawbacks. Keep reading to learn about the different business finance types and factors to consider before proceeding with one funding solution.
One of the first options you can consider is using your lifelong savings to finance your business yourself. This is sometimes referred to as bootstrapping, which means you’ll use minimal outside capital to fund your company and do most of the financing on your own.
This method might be one the most practical options, as it doesn’t come with any strings attached like making payments back to traditional lenders or accruing additional interest and debt. Business owners may appreciate this, especially if they own a small business with smaller profits. One of the negative aspects of dipping into your own savings is the risk involved if your business were to fail or your cash flow supply gets stretched too far.
The second popular option includes debt financing, which involves borrowing money from traditional lenders like banks or through other financial services. This can be accomplished through a credit card or a loan for your business, among other methods.
One of the top reasons business owners pursue debt financing is because they will retain 100% control of their business without having to forfeit any equity. Plus, the interest they pay back is typically a deductible business expense. If you pursue this route, you’ll need to ensure you can pay back the monthly payments along with interest, which may not be feasible if your business operates on a more seasonal basis or is just starting out. Also, this type of funding can be a difficult financing process, as factors like credit history and equity can be taken into account.
Equity financing is the opposite of the previous method. It involves trading equity — or a percentage of the business — with capital to fund your company. This is one of the most widely known financing methods, as venture capitalists or angel investors can make their money back by providing funding.
This process may involve less pressure or risk at the start, as the business owner does not need to repay the money. However, the business owner does need to forfeit a percentage of their business, which is one of the ultimate downsides to this financing method. Business owners could wind up losing control of their business if they give away too much equity. When you are looking for investors for your business, it is important to find those who share the same vision as yours.
Friends and Family
If the previous financing methods don’t align with your business goals then you may wish to seek funding from your friends and family. Borrowing money from a lender can be a big step, but it may be more financially wise to contact friends and family, rather than going through a lender first.
One of the reasons you may want to pursue this option is because the terms offered by your relatives or friends might be better than you’d get elsewhere. Of course, the downside to this method is that it could cause friction within your relationships if you fail to pay back the loan payments in a timely manner.
One of the most flexible financing methods is revenue-based financing. In revenue-based financing, you and the lender exchange a percentage of your business’s future revenue for working capital as part of an agreement. Payments are made on a daily or weekly basis until the total amount is paid back and the process typically takes days instead of months.
With revenue-based financing, you’re able to retain 100% control of your business. Also, revenue-based lenders don’t have strict eligibility requirements, so your credit history won’t matter as much as it would if you were applying for a bank loan. Plus, most revenue-based lenders will work with you to devise a schedule and payment plan that makes the most sense for your business. All in all, this option tends to be much more practical than going through venture capitalists or angel investors both in terms of the amount of profit you’ll be able to retain and the timelines associated with each.
Not every business is a right fit for revenue-based financing, however. For instance, if your company is brand new and doesn’t have a record of revenue, then this option may not be best.
Whether you’re expanding your business or simply need funds to make improvements, business financing can go a long way. As every company looks different, selecting the right financing is the most important. Consider factors like eligibility requirements, the size of the loan you need, how fast you need financing, etc. before making your decision.
If you require financing fast, then consider revenue-based financing with Mantis Funding, which offers financing in as little as 1 to 3 business days after you sign your financing agreement.
At Mantis Funding, we’ll help you get the most out of your revenue-based financing options. Simply fill out an application for funding today to get started!