Ways to get finance for your business
Covered in this guide...
Debt vs Equity Finance
You have two options when it comes to getting finance for your business. You can look for investors to help grow the business, this is Equity Finance. Or you can apply for a loan from one or more commerical lenders. The direction you take will have a massive impact on your business.
With equity finance, when someone invests in your business they are also buying a share of your business and hence a share of the profits going forward. So the cash injection comes at a price!
If you borrow funds, you will immediately have to begin paying that loan back, however at least you'll have all your earnings to pay it back with.
Understanding Debt Finance Options
Approaching banks for a loan is a common way to finance a business, yet it isn’t necessarily the right decision for every business owner. A bank will be strict about ensuring their borrower match certain criteria and may not service a businesses in the stage you are in. For example if you are a start up.
Friends and Relatives
Sometimes a business owner will look to private sources such as family and friends to help finance a business. Whenever you borrow from relatives or friends, consider it with the same formality as if you were borrowing from a commercial lender. Create a formal loan document, which should include the amount borrowed, the interest rate, speciﬁc repayment terms and an agreement in case of default.
Commercial ﬁnance companies can be attractive if your business is unable to obtain finance from other sources. Finance companies may be more willing to rely on the value of your security to repay the loan, rather than the history or profit projections of your business. Be aware you may incur higher interest rates with a finance company than with other lenders.
Business Credit Cards
With a business credit card, you can make purchases for your business, on credit, just as you would do with a personal credit card. This funding method is really only for day to day transactions that your business can afford and will pay off in full each month. Using a credit card in this manner gives you a chance to benefit from reward programs.
Crowdfunding is when you pitch your business idea to the public, commonly online, offering rewards or incentives to investors to help to meet your financial goals. Sometimes called “reward crowdfuding” or simply “donation,” it can be a good way to raise money for a new business if you’re confident you can attract funding with an interesting idea and appealing rewards. Crowdfunding can be used by existing businesses as well as start-ups needing to raise money for a new business idea.
Understanding Equity Finance Options
The obvious place to look for finance is your own money, your personal funding options might include your home or investment property.
If you own a freehold home, you might be able to generate funds from the value of the home with a home equity loan, using the value of your home as collateral. If you have a mortgage, you could get a home equity loan based on the difference between the value of the house and the unpaid mortgage amount. Some home equity loans are set up as a revolving credit line from which you can draw the amount needed at any time. The interest on a home equity loan is tax deductible.
Friends and Relatives
Again, turning to friends or relatives may be an option for equity, as it is with debt. Be aware that if you are asking friends or family to invest in your business, rather than simply lend you money, you have the added complication of them having a say in how the business is run. Make sure everyone knows the details of terms and conditions and seek legal advice.
Venture capital is ﬁnancing which comes from companies or individuals in the business of investing in emerging businesses in exchange for a share of the business. Venture capital may be an option for new businesses with limited options, which may have not yet reached the point where they are able to secure a bank loan or complete a debt offering. Venture capital ﬁrms will only invest in businesses which have high growth potential and are likely to be successful. Venture capital firms will often invest in high-risk businesses, espeically in the IT and technology fields, which they deem to have a competitive advantage, a strong value proposition or a proven demand for the product. While venture capital investors will be looking for substantial returns on the investments in their portfolio, they can also be a source of valuable guidance and business advice.
An angel investor gives you money to invest in your business, in exchange for some equity in your company. They invest in both new and established businesses. While angel investors usually stay out of the day-to-day running of your business, they may set some restrictions on what their money can be used for. The amount of finance available will depend on the angel investor, how much equity you are willing to sacrifice and the value of your business.
Government grants support new businesses, those in certain sectors of the economy or specific areas of the country. You do not need to pay back a grant and will be able to keep full ownership of your business. Although it is can be a good way to get an injection of cash for your business, most government assistance focuses on mentoring, upskilling and linking you with advisors and networks.