Having enough cash flow to sustain smooth operations is a challenge for many businesses. It’s often a juggling act to have sufficient funding on an ongoing basis to pay for the salaries, purchase inventory, manage leases, and so forth.
As such, getting the right finance strategy in place is important to keep your business on track. That’s why it’s wise to be across the different financing options and when they might come into play.
Whether you’re a start-up looking for capital or an existing small business trying to expand, here are the eight different types of business funding to be aware of.
8 Sources of Capital for Startups and Small Businesses
1. Bank loans
Getting a business loan can be a better alternative to a personal loan as it sets apart the company and individual funding, which is ‘cleaner’ from a tax perspective. It also reduces the business owner’s exposure. A bank loan is one of the most common options for business owners who are looking for funding. It’s widely available, and it typically offers competitive interest rates (although the lending standards are quite strict).
2. Business loans from specialist lending institutions
There are many types of financial institutions that provide business loans, including banks and building societies. That said, businesses are increasingly favouring non-bank, specialist lenders, private lenders and fintechs that offer different financial products that typically are more flexible in their lending criteria, require minimal documentation and are quick to process funding.
For example, Mango Credit, a private lending institution, offers bridging loans and short-term business loans like fast caveat loans, first mortgages, second mortgages and home equity loans. Their application can be made online, and funding becomes available within 3-5 days from the application. Mango Credit operates across Australia.
3. Bootstrapping
Bootstrapping is self-funding or investing your own money into the business. Whilst convenient, bootstrapping isn’t sustainable. It’s wise to develop a business plan, preferably in conjunction with an accountant, prior to investing funds.
4. Credit cards
A credit card gives a business owner easy access to a revolving line of credit. As mentioned previously, it’s preferable to have a business credit card (versus using a personal credit card), as it separates the funding lines, which is ‘cleaner’ from a tax perspective.
Just be aware that credit cards usually charge notoriously high-interest rates, which can mean that businesses accumulate debt quickly if the total card amount isn’t repaid monthly.
5. Government grants
The government offers grants, services and support to help businesses grow and succeed. You should consider checking if you are eligible to apply to any of these grants and what you could receive if you get approved.
The good thing is that government grants can provide funding without the need for equity. They also extend over many sectors and industry classes. That said, a major challenge when getting a grant is creating a credible business proposal and adhering to the criteria.
6. Friends and family loans
This can be the most convenient strategy to access financing because family and friends are most probably willing to lend you the money to fund your business. They also often allow you to return the money without interest or may agree to a longer repayment period.
The downside is that borrowing money from relatives or friends can be dangerous, as unpaid personal loans are renowned for and ruining relationships. To prevent this undesirable scenario, it’s best practice to place all the loan details into writing to include the amount, term and exit strategy (i.e. how you’re going to pay the loan back). This should also include what happens in the event that you can’t make payment(s).
7. Incubators and accelerators
Incubators give funding to businesses at the infancy stage, whilst accelerators support growth businesses. This structure gives you access to capital and mentorship, and other support that can help your business become stable and self-sufficient.
8. Crowdfunding
Crowdfunding is gaining popularity as a new way of funding small businesses. It involves asking the public to fund your start-up on crowdfunding websites. The way crowdfunding works is that you provide the details of your business on dedicated websites, its goals, plans to make profits, how much funding is needed, etc.
The people then invest money if they like your business idea. The main challenge with this approach is that you have to reach the funding target. Otherwise, you need to return the investment to your investors.
