5 Types of Business Financing. How to Avail Them?

 

As you grow your business, there are a lot of choices you can get to finance it. However, getting your business financed can be a challenging task, especially if you are new to entrepreneurship. You must do the necessary research to find the right financial solution. 

In this article, I will discuss the most popular type of business financing. Take a look and learn about the advantages and disadvantages as well as know how you can avail them.

Personal Funding

The personal funding option is used by most businesses because it is the easiest way to get them funded. Usually, your personal savings are the ones being utilized. If not enough, you can borrow from your relatives and friends or sell some of your assets.

Advantages

• Awareness of Your Funds. Financing your own business means you know exactly how much available money you have. 
• Full Control of Your Business. Using your money means having full control of your business. 
• Can Avoid Overspending. By financing your own business, you will only live within your means. You may want to purchase equipment and marketing materials first that are needed for production and running a business.

Disadvantages

• May Run Out of Cash. Since you have limited business capital to work on, you may experience running out of cash. 
• Slow-Paced Growth. When you have limited funds, your growth opportunities and your business cash flow are also limited. 
• Develop Your Connections. If you fund your business alone, you are the one that needs to find contacts and mentoring opportunities.

Business Loan

A business loan entails an agreement between a business owner and a private lender or bank. It is used to raise capital and fund operations to bring revenue to your business. Banks and lenders are willing to lend their money in advance as long as you pay it back on the agreed terms including the interest rate and the date of payment.

Advantages

• Increase Business Capital. It can increase your working capital to run your business and cover your expenses. 
• No Extra Charges. Some small business loans or medium enterprise business loans do not charge prepayment charges with early loan closure. There are a number of online lenders that do not charge extra prepayment fees such as Funding Societies, Stilt, Sofi, and LendingClub.  
• Flexible Options. For a short-term SME loan, terms can range from one month to thirty-six months. You can choose a flexible installment financing option in banks whether it is weekly, monthly, or bi-monthly.

Disadvantages

• Established Businesses are Preferred. Many lenders preferred clients with established businesses because of proven profitability. You need to present your records and invoices to serve as their basis for your application to get approved.
• Risk of Continuous Debt. If a bank loan is not managed properly, it can lead to an unending cycle of debt. You need to continuously borrow funds with high-paying interest in order for your business to get financed. 

Venture Capital

Venture capital financing is a term used to describe the process of raising money for new startups. Here, venture capitalists invest in your business to earn financial profit. The capital or financing is usually provided by an established investor, a financial institution, and other investment banks. They can also give support to your business through business coaching.

Advantages

• Lessen the Risk of Failures. An investor helps you manage the risks when it comes to decision-making and avoiding major issues.
• Growth and Expansion can be Achieved Faster.  In venture capital funding, the investors are ready to take the risk as long as they believe in the company’s long-term progress. They will guide you in building and expanding your business.
• Increase Business Networks. Venture capital lets you approach investors and business owners. Therefore, you can build your networks across the business community.

Disadvantages 

• Could Lose Management Control. They usually become part of your business’ decision-making process. If there are opposing opinions, then things can get different. Every major decision requires consent from them. So, there is a possibility that you could be losing control or ownership of your own business.
• It Takes Time to Receive Approval. Venture capitalists conduct assessments before they decide to invest. The process requires market study and financial projections that can delay your funding.

Crowdfunding

Crowdfunding is used to raise capital for your business venture through the support of a large number of people or investors. It can be used by businesses as a way to access funds. By using the online community, you can gain market insights and new customers. Most of the crowdfunding campaigns happen through crowdfunding platforms such as Fundnel, Indiegogo, and Kickstarter.

Advantages

• Increase Your Connections. Crowdfunding also allows you to build connections. You can meet investors that can give business coaching.  
• Design Your Crowdfunding. You can create your own campaign that is tailored-fit to your business including how much money you can ask from the investors. You can also decide how you want to run your business once you get the money.

Disadvantages

• Not Flexible. Once it is published, you cannot change your campaign. That is why you need to be clear about your business.
• Takes a Lot of Preparation. To be successful in your crowdfunding campaign,  you need to communicate with investors regularly. You also have to prepare detailed financial reports and plans of action. Once you put up the plan in place, that is the time you can launch your campaign.
• Payment for Platform Fees. You are required to pay fees for payment processing. Before you get into this crowdfunding option, you need to calculate all the costs. 

Government grants

The monetary assistance provided by the government help entrepreneurs run their businesses. For example in Singapore, you can apply for government assistance via GoBusiness Singapore. Direct grants are awarded to chosen business owners or organizations wherein they can spend the fund without the need of paying it back. 

Advantages

• Not Required to Pay Back. You do not need to return the money and pay interest once the grant is awarded to you. 
• Increase Business Visibility. Aside from getting a grant, this helps increase your business visibility. You can take that position to improve your business and idea.

Disadvantages

• Very Competitive. You need to create a convincing business proposal in order for your business to get noticed among thousands of applicants. 
• Have Certain Conditions. When your request is approved, you might need to follow certain conditions depending on the type of grant given to you. 

Final Thought

Business financing is essential in keeping your business running. But before you get one, you need to learn the pros and cons of the one you are getting. You need to make sure that this fund will help improve your business and not the other way around. Conduct thorough research and have a comparison of which type is suitable to your business needs and purposes. 

You have to ensure that your business has sufficient working funds and you spend and invest your money effectively. By learning more on how to get more capital through these types of business financing will potentially increase and improve your potential to create more opportunities. Whatever business financing you decide to avail, the rule of thumb is: You must gain something instead of gaining nothing.