Do you know how to finance your business? It isn’t always easy to get financing for a business, especially a new one that has no proven track record or past successes to impress lenders.
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Without funding, there are some businesses which simply won’t be able to get off the ground. Even if they can start, if there is no money for marketing or to buy good equipment, they won’t last very long.
It’s important, therefore, that you know how your business will be financed and that you can get the money before it launches.
There are many different options to look at; here are some that you can research to see which is going to work best for you and your company.
Bank Loan
When business owners think of borrowing money, the bank is probably the first idea that comes to mind, and it’s not a bad place to start.
Business owners can apply for various types of loans through their bank; it depends what they want to use the money for and how established their business is.
It’s a popular option, and it can mean you can secure a favorable deal with a low-interest rate. It also means that you know exactly how much you’ll be paying back each month and for how long.
However, there are strict criteria you need to meet before a bank lends you money.
What the criteria are exactly will usually depend on the bank and how much you’re asking to borrow, so it may not be an option that is open to you if you have poor credit or have had a business fail in the past.
Crowdfunding
Crowdfunding is the relatively new concept of asking strangers for money online.
There are many different websites which will host your crowdfunding campaign for you, and in return, they will usually take a percentage of any money you manage to raise.
You will need to do some research before you sign up to anything as not all crowdfunding sites are going to be suitable for your business.
Some will be better than others for small businesses, CrowdCube is a good example, whereas others are more useful for those looking to fund an art project, such as IndieGoGo.
Your campaign needs to have as much information as possible in it, including who you are and what your background is and why you are setting up your business.
Perhaps most importantly of all, you need to explain what your business does and why it is going to benefit people, especially the people you are hoping will help to fund it.
Projected earnings will also hopefully help people make a decision in your favor.
Share your campaign with as many people as possible. Social media is a great way to do this.
Angel Investors
An angel investor can be perfect for your business if you’re looking for advice as well as money.
These are third-party investors who will take a percentage share of your company in return for their investment.
How much is something you will need to negotiate? You will need to pitch your ideas and the company itself, and you will need to explain why you need the money and what you intend to spend it on.
If the idea sounds interesting to an angel investor and if the terms work for them, they will invest and give you advice along the way.
Personal Loan
Funding your business with a personal loan can also work out well as long as the business can pay you back.
If so, you won’t be out of pocket. You would take the loan out with Bonsai Finance; you would then make a director’s loan to the company.
The company would pay you back monthly, and that payment would cover the repayment you need to make to the original lender.
It means that the business can get off the ground much more quickly than it might otherwise do, but remember that you need to be ready for it.
If you’re not and you launch too quickly, you could make mistakes and alienate potential customers.
Another thing to bear in mind is if the company cannot pay you for any reason, you would still be liable to pay the loan back because it’s in your name.
It is wise to put one or two month’s payments to one side just in case this happens.
Credit Card
Although it is entirely possible to fund your business through a credit card, it may not be the wisest choice, especially when there are so many other options available to you.
It can, of course, be ideal for smaller businesses expenses, and used responsibly; a credit card can help you to purchase equipment without the need to go into any additional loan agreements.
Remember that you shouldn’t just pay the minimum each month, otherwise, the card will take much longer to pay off, and you’ll pay a lot more in interest.
Pay as much as you can without causing your company financial difficulty, and never think of a credit card as a long-term solution to cashflow issues.
Your 401(K)
Using your 401(K) to fund your business can be a wise step, but it’s always a good idea to speak with a financial advisor before cashing this in. You’ll need someone to help you through all the complexities associated with gaining this money.
However, if you do believe that your business can succeed and you have the business plan to prove it, then using your 401(K) is not so much of a risk.
In fact, having a successful business can boost your retirement fund, and you won’t be out of pocket by the time you want to step away from work and concentrate on enjoying your retirement years.
Factoring
Factoring is another way to release funds into your business, but this is not without its issues.
Factoring works by you invoicing your clients and then selling those invoices to a third party.
They pay you less than the invoice amount, but you receive your money immediately.
It’s the factoring company that then has to chase for the money, and you can forget about it.
This can really help with any cash flow problems, but it does mean you will get less than your budget may have accounted for.
If this is the case, you may need to put your prices up to incorporate the factoring fees, and this can be an unpopular move for some businesses.
