Lack of funds can paralyze your business. Without enough money, sustaining your operations will be difficult. But sourcing funds isn’t a walk in the park, and not all options are available for your type of business.
To increase your chances of getting the right resources, you must familiarize yourself with the different funding options for small businesses.
Types of funding options for businesses
Before we dive into the specifics, you must know first which type of funding option is ideal for your business.
Best for businesses with high growth potential
Equity financing is a funding method where you sell shares of your company to investors. This is common among start-ups and small businesses with huge plans for growth because investors favor businesses that can give them high returns.
- A good option if you need large amounts of capital.
- You have no obligation to repay your investors because they willingly buy your shares.
- Get funds even without a financial track record or credit history.
- Obtain business advice from your investors.
- Potential loss of control because your investors also become shareholders.
- You need to share your profits with investors.
- You must also consult your investors first before making decisions that may impact the company.
- Hard to obtain due to high competition.
Best for covering short and long-term business goals
If you don’t want to give up your full company ownership, debt financing might work for you. Debt financing is about borrowing money or taking loans from banks with the intention of paying it back within an agreed-upon period.
- You retain full control of your business.
- The interest in your business loans is tax-deductible as long as it can meet the criteria set by the Internal Revenue Service (IRS). Learn more about business expenses.
- It may not work for you if you don’t have enough financial track record.
- You also need to submit proof of a good credit rating to receive funds.
- Repaying on time is a must to maintain a positive credit score and to avoid incurring penalties.
- Most business loans are secured which means you need to provide collateral to your lender. This could jeopardize your assets, especially if you can’t pay back the money you borrowed.
Best for any businesses that want to explore other financing options
Alternative financing refers to funds that neither fall under the equity and debt financing categories. In most cases, you don’t have to repay the money you get from these sources. You can also retain full control of your business. However, you must meet specific requirements to qualify. Competition may also be high due to its appealing bid.
- Ideal for short-term goals
- If your business operates for a cause, say you promote sustainability and environmental awareness, this option is for you.
- You don’t need to repay the money you receive.
- You retain full control of your business.
- Tight competition.
- You may not qualify if you don’t meet certain criteria.
- Not ideal for long-term projects.
Is there anything that catches your interest? Do you think it suits your business goals? If yes, continue reading to learn where you can get your funds. You can also jump right into the category that you think is best for your business.
Best funding options for small businesses according to category
Best for start-ups with high growth potential and high industry impact
Angel investors are serial entrepreneurs or wealthy individuals who invest in start-ups or small businesses in exchange for business shares. Also known as seed or private investors, they often work independently.
If you’re interested in working with angel investors, make sure to choose someone who can understand your product and mission. It’s also important to create a solid proposition and a good business team to have higher chances of success.
Aside from providing you with funds, these investors may also give you valuable business advice and guidance to ensure you’re taking the right track.
Best for start-ups and mature businesses with lots of growth potential
Venture capitalists usually come from risk capital companies. Like angel investors, they also seek businesses with high growth potential, be it a start-up or an established one. Similarly, they require equity stakes or a seat on the board for the amount they invest.
Both angel investors and venture capitalists aim to fast-track the growth of businesses they work with so they can also realize positive returns quickly.
Best for tech-based businesses
A business accelerator is a program that provides start-ups with seed investments, mentorship, and connections to possible investors and business partners. It only lasts for about 3-6 months but the incubation can be intense. As the term suggests, its objective is to accelerate the growth of early-stage companies.
The funds used for business accelerator programs usually come from sponsors who, in turn, take a small equity stake in the business they invest in.
Here’s the catch: The process may be grueling. You can also expect a tight competition. But if you’ll take it seriously, the results can be rewarding.
Family and friends
Best for business owners with strong networks
Instead of looking for funds anywhere else, why not work with your close connections first? This option will work if your networks have strong entrepreneurial backgrounds or they have sufficient cash reserves to fund your business. It’s also more flexible compared to the first three funding options we discussed.
Depending on your agreement, it can be either an equity or a debt financing model. You can choose the equity model if you’d like to give them shares. But if you don’t want their direct involvement, debt financing is more advisable.
Just take note that when you seek funds from your personal connections, you also run the risk of damaging your relationships, especially if you can’t return what you owe.
As mentioned above, debt financing is about taking out loans or borrowing money. Before you take out any loan, make sure to do your research about its terms, interest rates, opportunities, and risks. Perform due diligence to reduce any harm or unfairness it may bring to your business.
In addition, you must check if the loan is secured or unsecured. A secured loan requires collateral while an unsecured one does not.
Best for funding different types of business goals
Bank loans for small businesses have three major types:
- Term loans can provide you with a high amount of funds that you can repay within three to 10 years, depending on its maturity date. You can use it for long-term expenses like buying a new asset or expanding to a new market. To qualify for this loan, you must have a strong credit history or long years of financial success.
- Intermediate-term loans are for business goals that are not long-term in nature but are not used to cover everyday expenses either. Its maturity date lasts from one to three years. Like term loans, you also need a strong financial standing to secure this loan.
- Working capital loans are used to sustain your daily business operations like rent, payroll, and utilities.
Best for risk-averse businesses
Loans from the Small Business Administration (SBA) have low-interest rates and flexible terms. Though it’s a government-backed loan, you can only apply for it on banks and other approved lenders.
Compared to actual bank loans, SBA loans have a longer and stricter application process. This may not be a good option for urgent needs. But if you can wait for up to three months, you can take advantage of its low-interest rates.
For more information, you can read this resource from the official SBA website.
Lines of credit
Best for urgent small-time expenses
A line of credit is a flexible, unsecured loan you can use to cover your daily business expenses. It is offered by financial institutions where they provide a maximum loan amount you can borrow.
Take note that the maximum amount you can borrow depends on your current credit score. The best thing about it is you can only borrow what you need to.
For example, if you borrowed $1,500 from your $10,000 credit line, all you need to pay for that billing period is $1,500 plus the interest rate. It’ okay if you won’t use up the entire amount. You can withdraw funds from a line of credit anytime, as long as it doesn’t exceed your limit.
However, you must refrain from using it for one-time expensive purchases. You must also pay your dues on time so you can borrow again and avoid incurring higher interests.
Best for business owners who are well-versed in cryptocurrency trading
A decentralized finance (DeFi) loan involves a peer-to-peer, cryptocurrency-based lending process where you can borrow funds directly from another person. There will be no intermediary like banks. Because there are no third parties involved, DeFi loans have better rates and less paperwork.
DeFi loans work through the use of smart contracts. It’s a computer-based contract that lays down the terms and conditions. Both users — the lender and the borrower — must satisfy its pre-programmed conditions to proceed with the transaction.
However, keep in mind that it’s not regulated by a government-mandated organization. Borrow at your own risk. And as we’ve said before, do your research first.
Alternative financing options
Still haven’t seen the funding option you’re looking for? Check out these alternative options:
Best for innovative companies and B2C startups
Crowdfunding is the method of raising funds from a large group of people. It works best for innovative projects that require a small capital investment to kick off the business. In most cases, individuals who contribute are those who believe in what you do.
To meet your crowdfunding goals, you must invest a lot of work and promote your ongoing campaign to increase people’s awareness.
Best for community-focused or mission-oriented businesses
During the COVID-19 restrictions, most small businesses rely on government financial support. It’s a huge help in sustaining the daily operations, especially when businesses have to close down temporarily.
Generally, government grants are appealing funding options for small businesses. You don’t need to repay it nor you will incur interest. However, it involves heavy paperwork. The government also specifies where you can only use the funds. If you’re lucky enough to be a recipient, you may be subject to an audit to make sure you utilize the funds based on their intended use.
You can still avail of grants even after the pandemic. But your chances of getting approved will increase if the purpose of your business aligns with the objectives of the grant. For example, if you champion the rights of women in getting decent jobs, you may be eligible for the Amber Grant for Women. Or if you have research programs that can benefit society, you can apply for the Small Business Research Program.
Sourcing funds is challenging
How can you get funds for your small business without experiencing extreme pressure? Identifying the most suitable option that fits your goals and financial circumstances can help you do so. But whichever funding option you choose, keep in mind that maintaining good business records can increase your chances of succeeding. And bookkeeping is what D&V Philippines does best.
Talk to our experts today to find out how we can help you streamline your bookkeeping system. You can also download our whitepaper, Investing for the Future: Adopting Cloud Accounting for Your Small Business, to learn the role of cloud accounting in improving your business records.