Top Financing Options for Small Businesses to Consider

Starting a small business is an exciting and fulfilling venture (…potentially). However, one of the biggest challenges that small business owners face is financing their operations. Having adequate financing is crucial for the success and growth of a small business, whether it’s for funding inventory, expanding marketing efforts, or hiring new employees. Without it, small businesses may struggle to get off the ground, let alone thrive.

The good news is that there are several financing options available to small businesses. However, the process of determining which option is best for your business can be overwhelming and downright daunting. With so many different types of financing available, it can be difficult to even know where to start.

In this article, we’ll explore the different types of financing options available to you, a small business owner and we’ll discuss the pros and cons of each option and also provide examples of financing sources that you can consider for your business.

By the end of this post, you’ll have a better understanding of the different financing options available to you and be better equipped to make an informed decision about the option that will best suit your business needs. So, let’s dive in!

 

I. EQUITY FINANCING

Equity financing is a type of financing where investors provide capital to your business in exchange for a portion of ownership or equity. In short, you are selling a share of your business to the investor, who then becomes a part-owner of the company. The investor will typically make a return on their investment by receiving a percentage of the company’s profits or collecting proceeds if they sell your business or have some “exit” activity. The amount that the investor receives in each of these scenarios is proportional to the percentage of equity they own in your company.

Pros for Small Businesses

• No repayment required: Unlike debt financing, you don’t have to worry about repaying the investment if things don’t financially go as planned for your business and you’re unable to repay the amount they invested in your company. Investors are taking a risk by investing in your business, and they hope to see a return on their investment in the future, but the reality is, you make a repayment to the investor is not guaranteed.
• Access to capital: Equity financing can provide you with access to larger amounts of capital than you might be able to secure through other financing options.
• Expertise and resources: Many equity investors have valuable experience and connections that can help you grow and succeed. This can include things like mentorship, networking opportunities, and access to industry knowledge.

Cons for Small Businesses

• Loss of control: Selling a portion of your business means giving up some control and decision-making power to investors. This can be challenging for small business owners who are used to having complete autonomy.
• Dilution of ownership: The more investors a small business has, the more diluted the ownership becomes for you as the owner, meaning the more investors you have the less of your company you own. This can make it more difficult to secure future investments that you need if you’ve given away too much of your company, and even make decisions about the company’s direction more challenging with competing investor opinions.

Examples of Equity Financing Options

Venture capital: Venture capital firms provide equity financing to projected high-growth companies with the potential for large returns. They often invest in tech startups or other businesses with innovative business models and large market sizes.

Angel investors: Angel investors are typically high-net-worth individuals who invest their own money in small businesses or startups. They may be more interested in smaller businesses or those in their local area. Angel investors don’t have to answer to Limited Partners like Venture capital firms do, so they are typically less demanding about a required return on their investment than a VC.

Crowdfunding equity platforms: These platforms allow multiple investors to contribute smaller amounts of money in exchange for a share in the company. Examples include Seedrs, Crowdcube, and Kickstarter Equity. Some platforms will charge for your campaign, as well as require certain funding targets to be achieved to receive any of the funds raised, so be sure to understand the terms and conditions of the platform completely before committing.

 

II. DEBT FINANCING

Debt financing is a type of funding where a business borrows money from a lender with the agreement to repay the loan over time, typically with interest. This can include things like business loans, lines of credit, and credit cards.

Pros for Small Businesses

• Control: Unlike equity financing, you maintain complete control over your business when using debt financing. Lenders don’t have any ownership stake in the company and don’t have a say in how it’s run.
• Predictable payments: With debt financing, you know exactly how much you’ll owe each month and for how long. This can make it easier to budget and plan for the future.
• Potential tax benefits: Interest payments on business loans are typically tax-deductible, which can help reduce your business’s overall tax burden.

Cons for Small Businesses

• Repayment requirements: You are required to repay the loan with interest, regardless of whether or not the business is profitable. This can be challenging if you are just starting out or experiencing financial difficulties.
• Interest costs: The interest charged on loans can be significant, especially for businesses with less-than-perfect credit scores.
• Collateral requirements: Some lenders may require you to put up collateral, such as business property or equipment, or even your personal assets unrelated to your business in order to secure the loan to mitigate their risk in the event that you are unable to repay the loan. This can be risky for you as the business owner if you are unable to repay the loan because you could lose the collateral (the assets you’ve promised) you’ve put up.

Examples of Debt Financing Options

Bank loans: Banks offer a variety of loans for small businesses, including term loans, lines of credit, and SBA loans.

Online lenders: Online lenders like OnDeck, and LendingClub offer various loan options for small businesses, including short-term loans, lines of credit, and merchant cash advances.

Credit cards: Small businesses can use credit cards to finance their operations, although this should be done carefully to avoid accumulating high levels of debt and interest charges.

 

III. NON-EQUITY-BASED CROWDFUNDING

Crowdfunding is a method of raising money for a project or venture by soliciting small contributions from a large number of people, typically via the Internet, by offering something in return such as your product or services, or unique package offers that are limited or one of a kind. There are a few different types of crowdfunding, including donation-based, rewards-based, and equity-based crowdfunding.

Pros for Small Businesses

• Access to a large pool of potential investors: Crowdfunding platforms can connect you with a wide range of potential investors who may be interested in supporting your project or product.
• Low barrier to entry: Crowdfunding can be a great option for small businesses that may not have access to traditional funding sources like banks or venture capital firms.
• Marketing and exposure: Crowdfunding campaigns can generate a lot of buzz and publicity for a small business, potentially attracting new customers or clients.

Cons for Small Businesses

• Time-consuming: Running a successful crowdfunding campaign can be a lot of work, requiring significant time and effort to create a compelling pitch and promote the campaign.
• Risk of not reaching funding goals: If a crowdfunding campaign doesn’t reach its funding goal, you may not receive any of the funds raised. Make sure to read the terms ahead of time!

Examples of Crowdfunding Platforms

Kickstarter: A rewards-based crowdfunding platform that allows you to offer incentives to backers who support your campaign.

Indiegogo: A crowdfunding platform that allows you to raise funds for a variety of projects, including technology products, creative works, and charitable causes.

SeedInvest: An equity-based crowdfunding platform that allows you to raise capital in exchange for a share of ownership in your company.

 

IV. GRANTS

Grants are a form of non-dilutive (you don’t give up equity shares of your company) funding that does not require repayment. Grants can come from a variety of sources, including government agencies, corporate organizations, and private foundations. Grants can be used to fund a wide range of business activities, including research and development, community projects, and even job creation. Keep in mind, some grants can come with stipulations as to how you can use the money received, these are referred to as restricted funds. An example of this would be if I receive a grant I can only use the funds to hire veterans.

Pros for Small Businesses

• No repayment required: Unlike loans, grants do not need to be repaid.
• Access to specialized funding: Grants may be available from organizations that specialize in supporting specific industries or types of businesses, providing small businesses with access to the funding they might not find elsewhere.
• Increased visibility and credibility: Receiving a grant can enhance a small business’s reputation and provide a boost to its marketing and public relations efforts.

Cons for Small Businesses

• Highly competitive: Grants can be very competitive, with many small businesses vying for a limited pool of funding.
• Time-consuming: Applying for grants can be a lengthy and involved process, requiring significant time and effort to put together a strong application.
• Restricted use: Grants may come with restrictions on how the funds can be used, which can limit a small business’s flexibility in how it operates.

Examples of Grants for Small Businesses

Small Business Innovation Research (SBIR) grants: These grants, offered by the federal government, are intended to support research and development for small businesses in certain industries.

Economic Development Administration (EDA) grants: These grants, also offered by the federal government, are intended to support economic development in specific regions or communities.

Local community grants: Many cities and towns offer grants to support small businesses and community projects.

 

CONCLUSION

You should carefully consider all of your financing options and choose the one that best fits your needs and goals. It’s important to do research on each option, read the fine print, and seek out advice from trusted advisors before making a decision. Once a financing option has been chosen, you should create a plan for how to use the funds and track your progress toward your goals.

Financing can be a complex and challenging topic for small businesses, but by understanding your options and taking the time to make an informed decision, you can secure the funding you need to grow and succeed.

Do you want to explore, deep dive, and learn more about financing options for small businesses? Make sure you subscribe (and connect) to us because we will be sharing a once-in-a-year event (with Georgia Secretary of State Brad Raffensperger) that will help you understand the ins and outs of fundraising to help you secure the fund that you deserve!

 

BONUS: Do you wonder what successful businesses invest in that every small business MISSES? Click this link and download the 3 THINGS EVERY SMALL BUSINESS OWNER SHOULD BE IN INVESTING now!