The growth of a small business is dependent on the availability of funds which are either generated internally or from external funding sources. Finances allow you to expand or acquire new premises, purchase equipment, and train employees among others which contribute to the progress of the business.
In contrast, a lack of funds can be detrimental to your firm. It becomes difficult to capitalize on the opportunities available in the market, and at the end, the business may stagnate or fail.
However, lack of funds should not be the reason why your business stagnates or fails. As the owner or manager of a small firm, there are many financing alternatives available to you.
They include bank loans, business grants, loans from friends and family, merchant cash advances, business lines of credit, crowdfunding, selling equity, and invoice factoring. Thus, all you have to do is to analyze the pros and cons of each to determine the best business funding options.
There are many factors to consider when choosing a lender. However, before going into the details, you should first decide whether you want debt financing or equity financing. Making the decision will allow you to eliminate some institutions from the list of funding options.
What is Debt Financing?
Debt financing is where you borrow funds from an external source to be used to expand the business. The loans are given out with strict conditions which can be specified in an agreement form.
As a business owner, you are required to pay back the money after a given period together with the accrued interest. You might also be required to provide collateral for you to obtain the loan. Traditional banks, small business administration, and friends and family are examples of sources of funding associated with debt financing.
The main advantage of debt financing is that you maintain the full ownership of the business.
However, this kind of financing has several drawbacks. You are required to make regular payments regardless of whether the firm grows, stagnates, or fails. The interest rates can also be high, and you might be forced to secure the loan by offering business assets as collateral.
What is Equity Financing?
Equity financing involves selling a part of the business in exchange for the funds. You are required to contact individuals or organizations who might be interested in the firm and agree to surrender part of the company in exchange for finances.
Friends and family, angel investors, venture capitalists, crowdfunding are sources of funding associated with the selling of equity.
The main advantage of equity financing is that you avoid debts since the fund is not a loan. However, surrendering part of the firm means that you will be required to share profits. You also have less control of the business due to the involvement of other parties who can also slow the decision-making process.
In summary, there are many sources of funding which can help your small business to grow. Choosing a financier can be a challenge due to the different terms and conditions associated with each. Deciding whether you require debt financing or equity financing allow you to eliminate some sources from the list of best business funding options.