During the life cycle of any business, many founders will be required to seek out capital to aid in business growth or to keep the ship afloat. Planning for the funding of your business is hardly a trivial topic, but in this article, we take a look at several options you could consider when considering to find outside funding your small business.
Debt VS Equity
Before we dive into some options, let’s take a look at the differences between debt and equity. Debt and equity are two routes that business owners can take to fund a business externally.
When debt is used the business owner receives a note for the cash funded. This “note” outlines all the terms of the loan, including repayment terms, interest and more. The benefit of making use of debt is that as the business owner, you retain ownership of your company.
The obvious downside, of course, is the obligation to repay the bank or small business lender. Should you fail to meet your commitment, the lender, be it a bank or other, could force your business into liquidation.
On the other end, Equity is another option. Business owners who opt for equity for business funding give over a stake to an investor in return for cash flow to either sustain operations, grow or pivot. The benefit here, of course, is that there is no obligation to repay any investors even though the goal would be to do so many times over. The downside, of course, is losing some ownership of your company which sometimes means losing some control as well. Let’s take a look at the various means of equity and debt funding.
Equity
Bootstrapping. Bootstrapping is building a company from the ground up with nothing but personal savings, and with luck, the cash coming in from the first sales. No equity is relinquished as a result.
Self-funding. It’s common in today’s business arena for many entrepreneurs to self-fund their companies at the get-go. They achieve this by making using of personal savings or personal debt, in the form of credit cards, personal loans or even second mortgage options. Moreover, entrepreneurs who commonly self-fund also sell assets to generate cash, such as holiday homes, vehicles, boats or any other assets worth selling for the business’s growth. This also doesn't not require you to relinquish ownership/equity.
Friends and family. Of course, friends and family present opportunities to provide both equity and debt funding. However, while this could seem like a good source of financing at first, be careful when selling portions of your business to friends or family. Businesses, regrettably, do fail. The loss of capital, as a result, can ruin friendships and relationships with your family. If you opt for this precarious option, ensure that your investors understand the risks - working with family (cliché)...
Angel investors. Angel investors are typically individuals or businesses that are notably affluent and willing to invest in companies. It’s becoming common practice among angel investors to form investment groups to spread risk and to collate research efforts.
Cloud funding. There are several groups which enable business owners to pitch their ideas to investors via the web. Commonly, when financing of this nature is successful, several investors will inject cash into the concept. However, be sure to do your research on the restrictions of how particular cloud funders tend to operate.
Partners. Recruiting the help of a partner is a common form of funding. Furthermore, the partner may or may not become an employee of the company. The addition of a strategic partner can be of benefit to your business through the alignment of resources. For instance, perhaps a property management business decides to invest in a property maintenance group? This could be a strategic move as the property management group could eventually dish out work to the maintenance company.
Venture capital. Venture Capital companies provide funding in different stages and phases of your business; as well as in different structures. Each VC investment could be structured differently, depending on their risk appetite at your stage, or based on your potential. They offer both Early-stage or growth stage, but in general due to their own structure will request more equity due to on their need to recoup the gains in a shorter period of time.
Crowdfunding. Crowdfunding refers to primarily web-based projects which allow individuals who have a concept, idea or business to employ the help of thousands of investors through various platforms. Investments commonly take the form of debt, equity or are rewards-based. Today, there are hundreds of crowdfunding platforms available, so ensure that you do your homework on the best fit for your business.
Debt
Small business lenders. Today, many organisations are interested in lending to small businesses. Here in South Africa, small business lenders such as LulaLend provide bridging finance, credit facilities, equipment financing and more to small businesses to help them expand, pivot or sustain operations.
Banks. Traditional banking institutions do make small business loans; however, they commonly require a proven track record and sometimes so form of asset to secure the loan.
Of course, there are many other options out there to fund your business; however, these should be a good start. With a robust business plan and persistence, proper funding for your small business will be a smooth sailing process, just ensure that you conduct the appropriate research before committing to any equity or debt funding.
For Small Business Loans get in touch with our industry partner for Business Loans, LulaLend
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