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Looking to launch your own business can be a challenging but rewarding experience. While having a strategic business model is vital for small businesses, funding is among the most crucial elements that a business needs for it to be successful.
Funds are the bloodline of any kind of business. That being said, funding startups or small companies can be a challenging and time-consuming process, particularly for those with poor finances. Though there is no cap on the minimum credit rating required for you to get a loan for your business, conventional lenders and creditors have a predefined range they find acceptable.
The time at which your SMB requires funding depends primarily on its type and nature. While you can consider the regular options of government small business loans, many SMB(s) often can’t avail of them. That’s why they ought to look for various sources of funds that are readily accessible to them to bankroll your business.
In this article, we will take a look at an extensive list of financial avenues for SMB(s) to raise capital for their business, evaluate the advantages of alternative lending, and offer tips on how their companies can be funded.
Financial Avenues for Businesses to Tap Into Their Potential
While practices like debt consolidation, a credit line secured through a bank, or public & private grants are great avenues to fund your business from, there are several other ways you can take to get the required investment to pump into your venture. Here, we will take a thorough look at them, along with understanding their benefits.
Self-Financing Your SMB
Also known as bootstrapping, self-financing is the most effectual way of funding your small business, especially if you are just starting out. First-time business owners often face difficulties acquiring investment from alternative and traditional sources, especially without displaying enough potential for success.
This is where self-financing from your savings, family, or friends is a great option. This amount is generally simpler to raise due to fewer compliance measures, along with generally lower capital. In several cases, family and friends are lenient with interest rates or don’t even ask for any.
Self-financing should be the first option that a small business considers, primarily due to its many benefits. When you invest your own money, you are not obligated to anyone else and are devoted to your business at any cost. However, this is a smart option only if the initial requirement is small.
Venture capitalists (VCs) are an external collective that participates in the company’s shares in return for funds. The stake of capital ownership is subject to negotiation and are based mainly on the business’ valuation.
The advantages of VCs, however, are not purely limited to their financial aspects. Working with a VC can offer you an insight into the industry, connections within it, and a coherent vision for your business.
This is exceptionally advantageous for startups and SMB(s) who lack the ability to develop a business and is where any assistance from an accomplished investment group is the most incredible option, as their guidance can often be of immense value.
Crowdfunding is among the relatively newer ways of financing a business, or an idea that has gained a lot of prominences off late. It’s the equivalent of taking out a mortgage, or, more simply, seeking investments from multiple people at the same time.
Crowdfunding is as simple as it sounds. The business owner will outline a brief description of their business on any crowdfunding platform. They introduce prospective funders to the objectives of their business, its profit-making strategies, the amount of funding needed, and so on.
Users on the crowdfunding platform can give money to the business owner if they like the idea. Those who fund the business usually make pledges to pre-purchase the product or provide a contribution, and anyone can donate funds to aid a business idea that they really believe in.
As part of the strategic partner funding, a second player in your business supports its growth by funding its return of privileged access to your service or product, personnel, licensing rights, final sale or a confluence of them all.
Strategic financing acts like venture funding, except that it is usually a sale of equity, although it can sometimes be premised on royalties where the strategic partner obtains a share of every sale made by the company. Partner funding is usually an excellent alternative as the business you partner with is typically an established one.
Generally, more prominent companies have more customers, a broader target base, sales reps, and marketing programs. As a strategic partner, you can access these resources right away, provided your product or service is consistent with what they already offer.
Seek Angel Investments
Many believe that VC(s) and angel investors are the same, but this isn’t true. While VC(s) are investor groups that fund your business through investment equity trading, angel investors are individuals that invest in startups or small businesses that don’t possess the quantifiable growth that VC(s) like to see.
Seeking an angel investor could also be a great idea in the same way as attracting investment from venture capitalists, albeit on a deeper level. They don’t just provide the funds, but also assist and guide you along the way.
Invoice Financing or Factoring
As part of the factoring or invoice financing scheme, a service provider, will usually lend you the money on your accounts receivable. After receiving the funds, you can reimburse the creditor once customers settle their bills. This way, your company has the working capital it requires to keep going, while you wait for customers to pay their respective amounts.
These advances let businesses narrow the earning gap between payments and billed work to suppliers and contractors. By closing this gap, companies can take on new projects quicker, grow their business, and employ new personnel by guaranteeing steady cash flow.
Seek Funding From Accelerators & Business Incubators
Businesses in their early stages of operation can also seek Accelerator and Incubator programs as a financing method. These programs are designed to help several companies every year.
Although used synonymously, there are few foundational distinctions between the two terms. Incubators support a business by providing business shelter resources, knowledge and networks, while Accelerators enable the company to take a giant leap in their growth.
These programs usually run for a good part of the year and require timely investments from the business owners. It also helps you network and makes connections with industry veterans, investors, mentors, and other startups.
Funding a startup is like fuelling a vehicle to get it moving. A robust financial backup is essential for a business to get off to a good start and sustain itself in the future. If you’re a small business owner, we hope this article helped you understand the different financial avenues you could consider to fund your company and unlock its true potential.