Lay the foundation for your startup with the right business funding
Whether you're talking about a small business, mid-size business, or corporate behemoth, business funding is always a concern. Business funding is especially important for startups, but every business owner needs to worry about having the proper funds to function.
To help your business get the funding it needs, we've put together this guide that will walk you through the importance of business funding, various types of funding, and how you can stretch your dollar just a bit further.
The importance of business funding
Simply put: Business funding is an essential part of business. Without proper funding, your business can experience cash flow problems, lack the working capital to hire the right employees, and fail to get products to market on time.
Business funding is especially important for startups and small business owners because funding is typically more scarce for small business owners than for larger businesses or corporations. There's a reason business funding is a key part of every business plan: Businesses can't function without it.
Unless you're running an entirely volunteer-based operation, you're going to need funding. So, let's look at how you can fund your business, and make that funding last a little longer while you're at it.
Funding your business
There are several primary ways to fund your business. Depending on the type of funding you choose, you're looking at different perks and downsides, as well as different processes for securing said funding. The following are some of the main ways businesses secure funding.
Traditional loan programs
When it comes to business funding, a traditional loan through a bank, credit union, or online lender is standard. A loan can provide great, safe business financing in many cases. This is due to the fact that reputable financial institutions offer loans complete with set terms and payment plans.
When looking for loans, look for a term loan. A term loan is a loan that's paid back over a set period of months or years, with payments staying constant. Depending on your credit score, you can get a loan with a low-interest rate, making this a great way to fund your business. Because a term loan has constant payments, term loans are easy to factor into your bookkeeping.
If you're interested in a traditional loan, shop around and compare interest rates and payment options. Credit unions can be great for smaller loans and often have local branches. But, many online lenders have excellent rates with great customer service as well.
Small business loans
If you're a small business in need of funding, you'll want to look specifically at small business loans. The Small Business Administration (SBA) offers a variety of small business loans with favorable terms. Known as SBA loans, these provide small business funding options that are specifically tailored to startups and small businesses. These loans often have lower interest rates, more lenient payment plans, and are fairly safe.
To find a small business loan, you can check with online lenders, credit unions, and banks. You can also go straight to the SBA website and use their small business loan tools to find an option that's right for your business.
Line of credit
For businesses wanting more flexible financing options, a line of credit is something to consider. With a line of credit, you have an ongoing account with a credit limit. This account can be used for purchasing, but typically comes with an interest rate if you don't pay your balance in full after each payment period. For example, if you charge $2,000 in a 30-day payment period, and only pay back $1,000 within that same period, you'll owe interest on the additional $1,000. This is similar to how a credit card works.
And a credit line often comes with a business credit card, which can be used like a regular credit card. One perk of a business credit card over a loan is that many companies, banks, and credit unions offer rewards that allow you to earn points or get cashback on qualified purchases.
Credit lines do have some risks, however. Your monthly payments won't be constant like they are with a term loan. This makes credit lines harder to budget for and opens you up to overspending and driving yourself into debt. This bad credit can damage your credit history, and as a result, your credit score. This will result in worse interest rates for credit lines and loans alike.
If you want to pursue a line of credit, take time to do some comparison shopping. Find a card that suits your company's specific needs before you go through the application process.
Crowdfunding is a type of funding in which consumers can purchase a product or service from your company before it launches. In exchange, you get funding to finish any necessary product development. Some crowdfunding sites also allow consumers to give your company money without the promise of a product or service.
There aren't many risks with crowdfunding, beyond the possibility of spending time to launch a campaign that flops. It's also possible that people will invest in your company expecting a launch product and then feel disappointed by the final product (or you'll fail to deliver). In this case, your brand can take a heavy hit, which can be difficult to recover from.
If you're interested in crowdfunding, sites like Kickstarter and Indiegogo are both good places to start.
Angel investors are individuals who fund businesses that catch their eye. More specifically, angel investors look for businesses that have the potential to be profitable. In exchange for investing, angel investors typically get some kind of equity in the business, meaning they expect a payout in one form or another.
The risk with angel investing is largely on the investors themselves. If your business fails to turn a profit, the investor loses out. You typically don't have to pay back the amount of funding received, making this a low-risk funding route. But, you are essentially handing over a portion of ownership, which can become detrimental if you're strategizing how to grow your company and you find yourself at odds with a partial owner.
Angel investors are an elusive bunch, but with the right moves, your business can attract one.
Venture capitalists are similar to angel investors, in that they invest money in companies with the risk that the money won't be repaid. But, venture capitalists are often part of a larger firm. These firms will scout out promising companies and reach out with funding offers in exchange for equity.
Like an angel investor, the risk with venture capitalists is largely on them, not you. But, again, if your company is incredibly successful, you could find yourself owing venture capitalists a sizable chunk. However, this shouldn't deter you from seeking venture capitalist funding, as it can be instrumental in getting a company off the ground.
If you want to secure venture capital funds, you'll have to position your business to attract investors and go through funding rounds.
Merchant cash advance
A merchant cash advance is a type of funding that comes from your credit card transactions. Merchant cash advances are offered by special providers that agree to take part of your customer transactions made via credit card in exchange for a business cash advance. The merchant cash advance provider will take small portions of each credit card transaction to repay this loaned sum of money with the addition of interest and fees.
Merchant cash advances can have high rates and be incredibly costly, so look to other options before pursuing one. And if you're still interested in securing a merchant cash advance, look around for a provider who offers the most competitive rates and fees.
All of the aforementioned paths can lead to business funding or financing. Each route has its own pros and cons, so be sure to think about what you’re willing to take on as a business beforehand. A loan can be great, while a merchant cash advance can come with a hefty price. Ask yourself if you’re willing to take on the added interest burden or if you can go without the funding a little longer.
Now that you know where to acquire funds, let’s take a look at how you can make your funding last.
Stretching your dollar
Sure, the above methods can lead to funding. But, any amount of money can fizzle out if you’re not making an effort to stretch your dollar as far as possible. The following two services can help your money go farther than before, allowing you to have better cash flow.
Utilize longer payment terms
Not every credit card or loan will have your standard 30-day payment window. Some cards, like the Brex ecommerce card, offer competitive credit rates with the ability to pay back your credit statement in 60 days rather than 30. This can help your cash flow by giving you more time to pay back your credit without getting hit by interest.
If you want to secure a longer payment credit card, consider using the Brex ecommerce card, which offers 60-day payment terms and great customer service.
Nothing helps your funding like smarter cash management. One way to better manage your funds is through a cash management account (CMA). A CMA is essentially an umbrella account that takes the place of numerous financial accounts at once. For example, your CMA could give you the functionality of a business checking account, business savings, and even an investment account all in one.
If you want to start a CMA to simplify your banking, the Brex Cash account provides a credit card and streamlined cash management.
The right funding for you
There are numerous ways to secure business funding: traditional and small business loans, lines of credit, crowdfunding, angel investors, venture capitalists, and merchant cash advances.
With some research and consultation with your accountant or any other stakeholders in your business, you can find the right funding for you. From there, the sky's the limit. Write down what you're looking for, don't settle, and soon you'll be resting easy knowing your business has the funding it needs.