It is important to understand that every business has their own unique set of financial goals and needs. The best financing options that may work for one business may not work for another business. Before sitting down to decide what type of financing options you need for your business, be sure to determine your business’ financial goals, financial state and financial needs.
Once you’ve determined your business’ financial atmosphere, you can now determine what type of financing you will benefit from. Financing is absolutely necessary for businesses wanting to grow or change, but it is important that you don’t spend too much on financing as it can derail your plans.
To help you achieve your financial goals, below is a list of advice on choosing the best financing option for a business:
1. Funding from Yourself, Friends and Family
The most obvious place for financing options is your own personal finances. This is particularly helpful and common for businesses that are in the startup phase. Of course, you still need to be strategic and ensure that you have enough money to support yourself too.
After you’ve consider your personal finances, you can reach out to family and friends for financing as well. However, make sure that you’re respectful of your friends and family, some may not want to put their savings at risk. If your friends and family help you finance your business, there are usually significant advantages because you can get better interest rates, if you have one at all, compared to other lenders.
2. Credit Cards
Sometimes, credit cards get a bad reputation because of their high interest rates. Credit cards are not ideal for all forms of financing, but they can affordably finance a new piece of equipment or supplies so long as you can pay the balance before expensive interest accrues.
In addition to larger purchases, credit cards are also useful for day to day operations. If you intend to use credit cards for day to day financing, a pro tip is to always pay the balance on time and in full. If you can’t do that, don’t use credit cards, because the interest will build up rapidly.
3. Personal Loans
Like credit cards, personal loans are a form of unsecured financing. Although, personal loans tend to be more challenging to obtain compared to credit cards.
If you can manage to obtain a personal loan, the funds can be used for virtually anything you need for your business. The best advice for this financing option is to be sure to read all the financing contracts you receive because some lenders may restrict the money you obtain.
4. Angel Investors and Venture Capitalists
Angel investors will invest their wealth into businesses and ask for equity in return. On the other hand, venture capitalists invest in companies that are growing rapidly, such as apps or software startups, and request shares in the company or equity that allows the investor to be active in the business operations.
Both angel investors and venture capitalists are more specific in their financing activities. Generally speaking, these types of investors will focus on a certain area of the market and provide businesses with their specific knowledge.
5. Partners
Reaching out to other individuals outside of your inner circle for financing purposes is another option. Not only do business partners provide you with financing, they usually provide valuable business advice they’ve acquired through their own experience.
Partners can help you with future opportunities as other lenders and business-related personnel will have more confidence in your business if you have an experienced partner on your team. Before moving forward with a partner, be sure to understand that they may have as much say in the business operations as you, you don’t want to conflict with a partner.
6. Line of Credit
A line of credit is one possible financing option for a business. A line of credit is similar to a credit card in many ways. However, there are some differences between the two financing options. With a line of credit, you can borrow money as you need it up to a predetermined limit. The benefit of a line of credit is you only ever have to pay interest on the money you borrow and the principal repayment is not necessarily due the next month.
Lines of credit are ideal for business owners that don’t know exactly how much money they’ll need for a specific operation, growth project or change implementation. They also come in handy for unexpected expenses and emergencies which every business will incur at some point.
7. Bank Loans
While bank loans can be difficult to obtain, there are advantages to working with a bank. For one thing, it will give you confidence in your business since obtaining a bank loan can be quite challenging, particularly if you’re going through a rough patch or are a startup.
Banks are also helpful with advice because of their expansive networks. Because bank loans are usually long term in nature, you will definitely be able to take advantage of the bank’s wealth of knowledge and network.