5 Types of Financing for Small Businesses

June 29, 2020 by Susan Paige

Securing the right avenue of financing for your small company is the best way to improve its chances of succeeding in the competitive world of business. There are several sources of financing to choose from and they each have different advantages. Choose wisely to secure financing that will help your business grow. Here are five financial solutions that are available to startups and could provide your company with the funding it needs to thrive.

Partner With a Venture Capitalist Firm

Approaching a venture capitalist such as S-Cubed Capital’s Mark Stevens is a great option for new businesses. The primary advantage of partnering with a venture capitalist is that it gives you the opportunity for rapid expansion even when you have little working capital. Venture capitalists can also help you navigate the world of business and make connections so your company can grow quickly. This is a good financial option for startups who need a significant amount of money quickly.

If you plan on attracting a venture capitalist, you first need to research potential candidates to see which types of business they are interested in. Ideally, venture capital firms want to diversify their portfolios so you shouldn’t try to approach one that represents a rideshare company if that is the premise your business is built on. You can start working on a pitch after you have identified potential candidates and you should tailor your pitch so it caters to each venture capitalist’s interests to make your business more attractive.

Try Crowdsourcing

Although crowdsourcing is a relatively new avenue of financing, it is a viable option for helping new companies get off the ground. Platforms such as Kickstarter allow you to advertise your business idea on the internet and then friends, family members and strangers can all donate money to the cause. While it may not help your business with working capital, it can help you raise money to build prototypes or stock inventory so you can launch your business.

Secure a Bank Loan

Many companies rely on traditional bank loans for the financing they need to grow. Loans are often tailored to meet the individual needs of your company and some are flexible and allow you to enrich your business in any way. However, you often need a good credit history to qualify for bank loans so this source of financing may not be the best choice for new companies. As a startup, your limited credit history may affect your ability to qualify for a bank loan. If your business has been around long enough to establish a good credit history, however, a bank loan could be the ideal solution.

Approach an Angel Investor

Angel investors are wealthy individuals who fund small companies with their own funds. Many angel investors have broad portfolios but have niche interests so you can expect to receive help with networking and business tasks if you approach an angel investor. For example, if your startup is within the tech industry, pitch your idea to an investor in the same industry that supports a wide variety of tech problems. The investor can then help you make the connections you need to grow your company quickly and sustainably.

However, you often have to pay a significant price to attract an angel investor. Angel investors often require a certain percentage of equity in the companies they fund. They also sometimes demand royalties for each business sale so they can make their money back in a timely manner. Before you approach an angel investor, it is important for you to identify how much control of the company you are willing to give up so you can negotiate effectively.

Use Your Savings

If you have a significant amount of money saved up and truly believe your business will succeed, you may be tempted to get the company off the ground using your own money. This option gives you complete control over the business and allows you to improve it in any way without discussing options with a financing partner. However, it is also the riskiest financing option. If you sink all of your savings into the company only for it to fail a few years later, you will be left with nothing. Not only do you lose your source of income, but you also lose the security of having savings set aside. Many people find the trade-off worth it.

Financing is a crucial component of success for companies of all sizes. It is especially important for small businesses with little working capital as financing is what allows companies to grow sustainably. These five options could benefit a new business. Consider the advantages and disadvantages of each one and weigh your company’s needs to determine which option is most beneficial for your company. In some cases, you may even want to secure multiple avenues of financing to help your business thrive.

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