Owning a business is excellent, but it can be expensive. Whether you’re bootstrapping or raising capital through equity investors, you will likely need cash to keep your business moving forward. Unless you have an endless source of personal funds, you need to find other ways to come up with the money your business needs.
Whether you are an aspiring entrepreneur with a brilliant new business idea or an established small business looking to expand and take on new ventures, financing your company will likely be a critical factor in your decision-making process.
However, not all businesses have family members who will loan them money or rich friends willing to invest in their ideas. This blog post discusses how you can get business finance for your small business and what financing options you should consider if starting and growing a company is part of your plans.
What is SME business financing?
Financing is funding a project or venture with the assistance of third parties, typically institutions or investors. SME business financing is obtaining funds (money) for a small business.
There are three basic ways to source capital for a small business, including raising equity capital, obtaining debt financing, or engaging in rewards financing (also known as equity-based crowdfunding). Although each option has its unique advantages and disadvantages, entrepreneurs typically choose a financing method based on their particular situation and business type.
Small business financing is a broad term that encompasses many options available to small business owners who need capital to launch and grow their ventures. You may choose one or more financing sources depending on your needs and your business. Your financing options will likely vary based on factors such as your industry, the amount of capital you need, and your personal circumstances (credit score, net worth, etc.)
Equity financing is when someone invests money in your business in exchange for an ownership stake. In this scenario, the investor expects a return on their investment, so they want to be fully repaid plus interest.
If you’re seeking equity financing, potential investors will want to know the details about your business, its financial situation and growth plans. You’ll also need to be prepared to share a good deal of information about yourself and your finances.
While equity investors may be willing to wait for you to pay back their initial investment plus interest, banks and other traditional lenders are not. Equity financing, along with other non-traditional forms of financing such as loans from family and friends, is appealing because they typically don’t require the business owner to prove the ability to repay the borrowed funds.
When you borrow money from a bank or other lender, you are using debt financing. Debt financing allows you to use someone else’s money to help finance your business venture.
Debt financing can be risky for both the borrower and lender. If your business is struggling financially, you may be unable to pay back the total amount you owe. Likewise, the lender may not receive the return they were expecting or may even lose the money they loaned to you. Banks and other financial institutions typically provide short-term debt financing for small businesses.
This type of financing is often referred to as an “asset-based loan” because the lender is generally not concerned with your cash flow or other financial factors. Instead, they are interested in the value of your assets and collateral, such as real estate, machinery, vehicles and inventory, to ensure they receive the total amount they loaned.
Rewards (reward-based) financing
Rewards financing, also known as equity crowdfunding or reward-based financing, is a variation of equity financing. It is often used by entrepreneurs who are trying to raise money for their new ventures using online platforms that offer what is known as rewards-based crowdfunding.
Unlike traditional securities-based crowdfunding, rewards-based crowdfunding does not require the business owner to issue an investment security for the funds raised. That means there are no regulatory requirements or compliance issues to deal with, making this a quick and easy way to obtain financing from a large group of people.
Unlike traditional forms of financing, rewards-based crowdfunding doesn’t require the business owner to give up a portion of their company or make promises about when they plan to pay back the money that was initially borrowed. That said, it does come with a few risks. One of the biggest is dealing with disappointed or disgruntled backers if your company fails and you can’t repay them.
Banks and other financial institutions offer a wide range of trim business loan options, including business lines of credit, commercial real estate loans, SBA loans, and more.
Depending on your industry, you may also be able to apply for government-backed loans and grants that are designed to help small business owners finance their ventures.
The Small Business Administration, or SBA, is an agency within the U.S. government that offers a variety of financial assistance programs designed to help entrepreneurs. Among the many loan options available to small business owners, a commercial loan is likely to make the most sense for most entrepreneurs.
Commercial loans are offered by banks and other financial institutions that make money by loaning money. Commercial loans are typically long-term loans with fixed interest rates. There’s no guarantee that you’ll get approved for the loan amount you request or that the interest rate will be affordable or within your budget.
Financing your business is more than just generating the money to get your venture off the ground. Financing options are also important when you need to make strategic decisions like acquiring new machinery, purchasing real estate or expanding your operations.
When financing your business, there are several options, including equity financing, debt financing, rewards-based crowdfunding, and more. The trick is to find the financing option that works best for your business, financial situation, and personal goals and objectives. Depending on the financing you select, you’ll either have to make a significant upfront payment or promise to repay the money over time.