If you’re an entrepreneur, chances are that you will need funding at some point. Whether you need to purchase equipment, take advantage of an opportunity, or get through the season, a quick jolt of cash might be necessary. However, it’s not a case of closing your eyes and placing your finger on one. The different types of financing for your business all have their own pros and cons. Here’s why choosing the right funding option is so important.
Investors
Getting investors might be the choice for you. If you have willing partners for your business, then you spread around risk. However, this also comes with spreading around the profits. You may also have to give up some control of your business. If you’re not comfortable with this, then it may not be a great choice. However, if your investor is aligned with you on the general direction of your company, then it should be a great choice. This is also a great option if you don’t have a lot of assets to secure a loan. A tech startup or something may choose investors over a loan.
Small Business Loans
A small business loan may be more appropriate if you have assets to use as collateral. A restaurant or bar may choose to go this route since they can get a favorable interest rate by putting their building up for the loan. With a small business loan, you can go with one of two options. A short-term loan gets funds into your bank fast. There are fewer hoops to jump through, but because of this, they can have some high interest rates. Their repayment schedules are short, so you have to pay back fast.
Long-term loans are the opposite. You pay them back over a long period. They are harder to get approval for, because the bank is taking a risk on you paying it back. This can be tough for new businesses, because they may not have assets yet and they don’t have a track record.
Crowdfunding
It could be that you have such a great idea that all sorts of people want to see it become a reality. For cases like these, crowdfunding might be the best option for you. You can offer rewards for certain funding points, and you can get a sense of what consumers want. There are many sites that facilitate this type of funding. For it to work, you have to be a sales person first and foremost. You are selling yourself and your products. If you are not up for selling in this way, then this option might not be for you.
Self-Funding
This method, known as “bootstrapping,” means that you will pull out of your savings when you are in trouble or starting out. The best thing about this method is that you won’t owe any money or have to sacrifice profit. However, you do run the risk of losing your savings if you go this route. Many businesses get started this way because their owner has the savings to do it. Investors may also look favorably to you since you have invested in your own money. Certainly not a choice for an entrepreneur who has little in the way of savings.
It’s important that you make the right choice for your business. It will very much depend on your circumstances and financial situation. Never choose one or the other because your bank offers you something or because you don’t know any better. Choosing the right funding option may be the key to your business being a success.
