Does Your Business Need Funding? Things You Should Know About Before Getting a Business Funding

 

If you are planning to start a business, raising funds is a step you need to think about. It can be a problem for those who are not experienced or don’t have the understanding of how to raise funds. A lack of enough working capital is the common reason why some eCommerce businesses cannot afford to scale their business and serve more customers. So, how can start-ups raise money for their business?

There are various financing options available for entrepreneurs like you to get your business out of a lack of funding scenario. You just have to go through the process of raising money and need to consider things such as the type of funding you will opt to get, the type of lender you will be loaning the funds to, the associated fees, and how the money will impact your overall business growth. If you are not yet familiar with these, do not worry because, in this article, I will explain how to get funding for your business. 

What is Business Funding?

Business funding is a term that encompasses a variety of different funding sources. It can be in the form of cash, loans, or lines of credit. It is used to describe a range of financing tools that a business can access to get started. It is also a financial arrangement that allows owners to continue growing their business without needing to immediately pay for it. These can be anything from working capital lines of credit to revolving of credit, from loans to private equity. 

Don’t fall into a scammer’s trap! Learn here how to accept business funding. 

It is extremely popular and can be very lucrative for both the entrepreneur and the investor. Despite being popular now, getting one can be quite challenging. You need to understand the various funding sources as well as know the legal and tax implications of funding. Most importantly, you need to learn the application process. 

Why Do You Need to Know the Basics of Business Funding?

Obtaining a fund is a critical step in growing your business. You need to know where to get these aside from your own personal money. Also, as an entrepreneur, you should understand the basics for you to find the right business financing. 

• To Know the Type of Financing Your Business Needed

There are various types of financing options you can choose for your business. However, it can be tricky to understand which one will be best. For example, the most common way for start-up or expansion is to get a loan from a bank. But banks are notoriously stingy and will not loan you money unless they know you can still pay them even if your business didn’t work out.  

• To Know the Tax Implication 

The tax implications depend on a number of factors including tax rates, the type of business funding provided, and the amount of time it takes for the company to earn a return on its investment. Also, these vary in different countries. 

Any business funding used to start a business is subject to investment tax rates. In general, this is the same rate as for capital gains which are generally taxed at the same rates as gains on other assets. 

However, business funding used to buy and install equipment or software in the new business is generally considered “Qualified Business Acquisition Debt (QBA)” which is taxed at a flat 21%, same with the federal income tax rate. Funds used to purchase a business, either as an investor or a seller, are taxable immediately at their fair market value. 

• To Know if You are Getting a Good Deal or Not

When it comes to business funding, the main question you should be asking yourself is “How much money will I need for my business?” It is common for start-ups to have a hard time looking for an investor. So, when you are able to find one, you should be able to determine if you are getting a good deal in your funding or not. 

For example, if you are seeking a business loan, there are a number of things you need to take into consideration before you apply. It includes the cost of the loan, the interest rate you will be charged, the length of the loan term, and the collateral attached to the loan. 

5 Signs to Know if Your Business Needs Funding

Whether you are a start-up or not, when your business is still not growing then you might need additional funding. However, it is essential that you know how to measure your business’ success before applying for a business loan. If you haven’t listed down yet those measures, I suggest that you consider the following: 

• Not Having a Healthy Cash Flow

Healthy cash flow is the cornerstone of a healthy business. This allows your business to keep running and growing. If your cash flow is not healthy, then your business is unstable. Chances are, you will not be able to invest or expand your business. When this happens, you need outside funding to stay in business. 

• Needs to Purchase More Inventory

Every business needs to have a healthy amount of inventory on hand to ensure the timely delivery of products and services. And when you need to purchase more inventory, it means that your business is growing. The more inventory you purchase, the more financing you need to make more money. 

• Additional Staff to Hire

Hiring additional staff is a sign that your business is growing. As your business grows, more demands need to be met. Having enough team members to handle all the tasks can increase efficiency and, in the long run, increase your sales. 

• Acquisition of New Equipment and Software

If your old equipment and software cannot keep up with your business growth, then you need to acquire new ones. Acquiring these would allow your business to be efficient and have better outputs. 

• Business Expansion

Business expansion is a common goal among start-ups. Expansion plays a crucial role in the success of a business. It may include opening in a new location, expanding services, and adding a new product to the line. And for it to be realized, then you need funding to have bigger capital. 

Best Financing Options for Your Business

Business owners like you are always looking for ways to improve their cash flow and reach financial freedom. But before you reach that level, you need to, from time to time, borrow money to keep your business running and growing. 

There are many types of business financing available out there. Some of these include trade credit, business credit, invoice discounting, capital leases, factoring, credit lines, and equity loans. The choice of which type of financing to pursue will depend on a number of factors. 

For example, the type of business you are running. You need to consider whether you are starting a hobby or a company. You also need to look at what you want to achieve. You need to ask yourself “Why am I borrowing for? Is it to fund a new product or keep my business running?” 

Your answer to this question will assist you in choosing what type of business loan you need to apply for. And to help you understand business financing, I will explain each one of them. 

Personal Funding

Personal Funding is a tool for helping you start or grow your business without having to go through the hassle of finding a traditional bank loan. It is a good alternative for small businesses, startups, and entrepreneurs who want to tap into a targeted funding source. Usually, the fund comes from your savings. But it can also be an act of borrowing money from a friend or family member. 

When your business does not need a huge amount of capital to start or grow, it is better to choose personal funding simply because you will be able to avoid the cumbersome and time-consuming process of getting an institutional loan. On top of that, you don’t have to pay interest, unlike other business financings which can be quite high. 

Business Loans

If you have a business idea that is in the early phases of development, financing may be a barrier to success. Business loans are a popular financing tool for those who need to expand their business or start up a new one. These are usually offered by banks, credit unions, and other financial institutions. These are also popular among private lenders who are more likely to give out business loans than banks. 

Usually, the amount you can borrow from a bank is determined by your credit score and based on your credit history. Before the bank grants your loan, they will check first your business if it is feasible and will have a good return on investment. If they think that your business is not that profitable, chances are, they will not approve your loan. 

Venture Capital

Venture capital is an investment tool that helps startups, small, and medium-sized businesses obtain necessary resources and expand their businesses before going to market. It is a relatively new approach in financing new businesses but has been used extensively during the last ten years. 

When a new venture is proposed, the venture capitalists will evaluate the value of the company, its prospects, and funding options. After a thorough evaluation, the venture capitalists will invest in early-stage companies in exchange for a share. Aside from financial assistance, they will also provide professional support. 

Crowdfunding

Crowdfunding is a new business funding tool that allows individuals to support projects which they believe in. It is a process of raising money from a large group of people and then will fund small businesses’ new and innovative ideas. There are no set limits on how many can participate in the crowdfunding process. Also, anyone can start a crowdfunding campaign. The good thing about crowdfunding is its democratization of small business growth.

Since crowdfunded projects are financed by a pool of individual backers, unlike traditional business funding platforms such as venture capital and angel investor networks, there is no required collateral. Investors do not need to worry about being responsible for the product’s production, marketing, and distribution. 

Government Grants 

Government grants are a type of financial assistance from the government. These come in multiple multiple forms, each with a purpose. The fund is given in exchange for specific projects, activities, or services. The money can be used to purchase supplies, services, equipment, or training. 

Among all types of business financing, I can say that government grants are a great way to get the money you need to run your small business. These are like free cash that would assist your business to keep running and growing. If you want your business to be included in the list of grantees, you need to complete the government grant application.  

5 Things You Need to Know to Get Business Funding

It is true that getting business funding is always challenging. However, if you know the process and understand the basic requirements, you can get the funding your business need without needing to go through hassles. 

• Create a Business Plan

Creating a business plan not only guides you towards success but also allows your possible investors to get to know your business goals. Through this document, you are giving them a comprehensive picture of what your business would want to accomplish in the future. A well-written business plan will help you convince them of the viability of your business idea. 

• Attend Business Events like Seminars and Conferences

Attending business events like seminars and conferences is a great way to meet potential investors. It is also the best venue to widen your networks. Aside from getting possible funding, you will also learn how to grow your business directly from industry experts. 

• Research What Funding Programs Your Business is Qualified For

There are a lot of funding programs, both public and private, that your business can apply to. All you need to do is to research these programs and see if your business can meet their criteria. If you are eligible, then you just need to comply with their requirements. This kind of funding will definitely benefit your business. 

• Maintain a Healthy Credit Score

As I have mentioned above, your credit score matters when you are applying for a business loan.  Having a good credit history makes you a trustworthy debtor. Aside from that, it can help you determine how much loan you can qualify for and what interest rates to expect. To maintain a healthy credit score, you need to stay responsible with your monthly payments and pay them on time. 

• Look for Possible Investors

Getting investors is essential for start-ups. And if you want them to invest in your business, don’t wait for them to come to you. Instead, aggressively look for them. Send them your business proposal and market your innovative idea. Be proactive so that you can get off the ground. 

Final Thought

Getting into the business world is both exciting and scary. As you start, it is normal that you also feel a little scared because you are about to dive into many possibilities. You might not also choose not to start even if you have good ideas in mind because your capital is not yet enough to fund your business. 

However, based on my experience, if you have great business ideas it is better to start even if you have little funds. There are many various options available that can get you out of a lack of fund dilemma. You can avail of business financing that can give you a huge amount of capital but comes with high interest and high expectations or opt for no-interest loans but only give you a small amount of funds. Whatever you choose among the above-mentioned options, what I can suggest is to find the right one that best fits your business so that the fund you would get will help you start, run, or grow your business and not the other way around.