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Business funding is a complex and often misunderstood topic. There are many different types of funding available, and the process of securing funding can be daunting. This article will provide a brief overview of the different types of funding and how to get the money you need to grow your business.
The Different Types of Funding
Among the different types of funding available for businesses, each has its own advantages and disadvantages. The most common types of funding are debt, equity, and grants. Debt financing is typically in the form of loans from financial institutions, while equity financing comes from investors, venture capitalists or borrowing against owned assets like real estate. Grants are typically awarded by government agencies or foundations and do not have to be repaid.
Using Debt Financing
As a business owner your surest form of funding is through debt. This type of funding comes in the form of a loan from a financial institution be it a business loan specifically allocated to grow your business, a personal loan for more flexibility, a revolving line of credit as a safety net, or some sort of revenue based loan where you can leverage the income your business is producing. Loans offered by commercial banks are often times hard to qualify for because of strict qualifications and long processing times, you must be prepared to produce proof of business financials dating back to the conception of the business. For these reasons many business owners turn to the alternative lending industry where qualifications are minimal and funding can be received in as little as a few days. Understand that these options have the potential of becoming heavy financial burdens if not planned out accordingly, varying interest rates and daily payback terms are common characteristics of many of these alternative lending products.
Using Equity
Another way of funding your business is by pitching your idea or business to venture capitalists and investors who will either help raise money for the business or invest in the business for a portion of the profits or equity in the company. Seeking funding from investors requires either a great deal of past success in order to incentivize investors or a well thought out and quantifiable business plan. Equity financing also refers to leveraging home equity for business funding, this alternative can be done through a home equity line of credit, a home equity business loan, or a home equity investment. This method of business funding is a great way to use the value that you've built through your home to fund a business endeavor, home equity loans typically offer predictable interest rates. Home equity investments allows you to cash out in exchange for a portion of your future home value, this is appealing because of the versatility you have with the cash and the fact that these investments are settled 10 to 30 years down the line. A refinance can also be executed with equity of your home by paying off an existing mortgage with one of a greater value, this method of utilizing equity comes with lower interest rates but will extend your mortgage payoff timeline. One of the most flexible forms of using home equity is the HELOC, access funds anytime you need without penalties, the only drawback is the variable interest rate which means unpredictable payments.
Using Grants
Grants are forms of funding that do not need to be paid back, they are typically provided by the federal government or different business programs. Your best bet would be to do as much research as possible and find a grant program that suits your business needs and business profile qualifications. Visit the SBA or Grants.gov for more information.
How to Get the Money You Need
The first step in securing funding is to develop a well-crafted business plan. This plan should outline your business goals, strategies, and financial projections. Once you have a strong business plan, you can begin approaching potential investors and lenders. When pitching your business to potential funders, be prepared to answer tough questions about your financials and your business model.
Making the Most of Your Funding
Once you've secured funding, it's important to use it wisely. Use your funds to invest in your business, hire new staff, or expand your operations. Be sure to track your progress and financials closely, and keep your investors updated on your progress.
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