In some cases, businesses need financing to fund expansions or pay for start-up costs. There are several options for raising capital, depending on the kind of business you run.
Beyond using your personal savings, the most common methods of financing are obtaining a loan, equity financing through selling shares in your business, and debt financing.
There are also additional options, such as crowdfunding, credit cards, and purchase order funding.
Top Effective Ways to get Financing for Business
Here’s a breakdown of three effective ways to get financing for your business, along with the steps to get them.
#1. Getting a business loan
Identify business lenders
Businesses are most commonly financed through debt financing. This involves taking out a loan and agreeing to pay it back over a specific amount of time. Lenders will charge interest to make a profit. The three most common business lenders are commercial banks, the Small Business Administration, and online lenders.
When doing business with a bank, you can visit them and ask about getting a business loan. The SBA doesn’t technically make any loans, but they do guarantee loans for small businesses.
The way this works is if you default, the Small Business Administration will cover your loan. Your business qualifying as “small” will depend on the industry you’re in. Online lenders usually have the loosest lending standards of the three. They won’t require you to pledge collateral.
Nonetheless, you’ll have to be sure the lender has a good reputation by checking either the local consumer protection agency or the Better Business Bureau.
Once you’ve chosen your option, you’ll have to gather the necessary paperwork for the lender to analyze your business’ finances before giving the loan. The paperwork you’ll have to collect includes resumes for all managers and owners, a business plan, business licenses, commercial leases, and articles of incorporation.
Additionally, you’ll have to collect personal and business tax returns in the past three years, personal and business bank statements, and personal and business credit reports. If preparing taxes has been a challenge for your business in the past, here’s a great source for tax preparation.
Update financial reports
Most lenders will require you to submit financial reports. There are four things that should be a part of the reports. The first thing is a signed personal financial statement from anyone who’s a significant owner of the business.
In most cases, you’ll need personal financial statements from anyone who owns more than 20% of your business. You’ll next need to have a balance sheet for the business. It’s a snapshot of the business that contains information such as owner’s equity, liabilities, and assets.
You’ll also have to provide an income statement, which shows your business’ profitability within a specific period of time. Lastly, cash flow analysis should be included in the financial report as well.
Review credit history
If your business isn’t established, banks generally won’t lend to you. Instead, they’ll lend based on your personal credit history. It’s important to review your history and fix any errors before applying for a loan.
Common errors in credit histories include wrong credit limits, accounts inaccurately listed, or inaccurate balances. Errors can be disputed online or through writing a letter to the credit bureau with the error.
Consider pledging collateral
It can sometimes be easier to secure a loan if it’s backed up by assets that are pledged as collateral. If your loan defaults, the lender can take your assets. Examples of what you can pledge as collateral include homes, equipment, vehicles, and other assets.
You can talk to banks about what specific requirements they have related to what you pledge. Be sure to fully document the value and condition of your collateral. As an example, your collateral may have to be appraised.
Compare different loans
Loans can vary when it comes to interest rates, fees, prepayment penalties, and repayment length. With interest rates, find out the percentage that will be charged annually on loan. Some loans may require you to pay fees such as origination.
It’s important to carefully read the details of each of them. If you’re interested in paying off your loan early, you’ll have to review which of the loans you’re considering doesn’t have a prepayment penalty. You’ll also want to compare how long you’ll have to pay each loan by reviewing the length of repayment for each one.
The longer it is, the less you’ll pay each month, but be mindful that the total amount will end up being higher. Once you’ve decided on a loan, you’ll provide the required information and submit your application. Be sure to double-check that it’s all accurate before submitting and keep a copy of all your records.
#2. Attracting investors
Identify target investors
If you decide to pursue investors to finance your business, the first thing you’ll have to do is identify which ones you’ll target. Getting an investor means you’ll have to sell ownership shares in your business.
There are a few different types of investors. A partner is someone who you could add to your business and turn it from a sole proprietorship to a partnership. The partner should ideally have the skills you need, such as experience with product development, marketing, and sales. General public investments involve public companies selling shares to the general public.
If you desire to pursue that approach, you should seek advice from a securities lawyer to discuss options. Be mindful that “going public” can be a lengthy process. Angel investors are wealthy individuals who will invest in start-up businesses in exchange for involvement in day-to-day affairs or a place on the business board.
Lastly, venture capital firms will research your company on behalf of investors. If they decide to invest in you, they’ll desire decision-making power in exchange for funding. They’ll also work closely with you to grow your business.
Know the pros and cons of raising equity capital
When you sell a share of your business, you have a new owner who’s entitled to a share of your business profits. They also get access to your books and likely a right to vote on business matters. In some cases, depending on the business you run, you’ll have to give up more than 50%, which causes you to lose control.
Nonetheless, you wouldn’t owe them money if the business were to fail. Be sure to carefully compare raising money through this route with the other options you could pursue.
Start your search
Finding investors can be a challenge, as some only consider investing in businesses in specific industries or require that business has already raised six figures on their own. One way you can search for them is by looking online.
Type “investor” and the name of your industry in a search to see what comes up. You can visit their websites and review the companies they usually invest in before contacting them. Another option is to contact your local Chamber of Commerce to see if they have any leads that they can give you, or know of any local investors.
You can also consider looking into the Small Business Investment Company directory, run by the Small Business Association. They license private investment funds. Lastly, you can look into a business capital broker who has networks of investors that they can potentially match you to. A lawyer can help you find a business capital broker.
Give a winning presentation
When you get a chance to pitch your business plan to an investor, you’ll need to make a compelling presentation that shows your product or service is attractive, and your business is well-positioned for growth. Be sure to summarize your business in one sentence.
You should also research your investors and work to create a personal connection with the investor. Bring a sample of your product or make a short video of your service for the investor to see your business in action.
#3. Other funding options
There are a few other possible funding options you might be more interested in. Purchase order funding is one option where a finance company will pay your supplier for the goods you resell. Be mindful that this financing works only if your markup is large.
The gross profit margin will need to be at least 30%. Contact a financing company about this funding option. Asking family or friends for a loan can be another way to finance your business. This option is ideal if you’re only borrowing a small amount. You should approach them seriously like you would a normal lender.
Offer to pay interest and bind yourself contractually to paying the money back through writing up a promissory note and sign it. If you have a one-off idea, you can pursue crowdfunding. You can create an account through a crowdfunding site, and anyone who visits can donate to the project. This kind of financing is good for smaller, discrete projects and not long-term financing.
There are various options to have your business financed. Take time to do your research and determine which financing option is most suitable for you.