Many businesses need to access finance at some stage in their lifecycle to help fund growth. It’s important for business owners and finance directors to be prepared, plan for different scenarios and must have a backup plan to ensure there is always sufficient working capital and balance sheet finance for the business. Business owners often rely on equity and debt to obtain external finance.
Debt is beneficial in retaining ownership of a business, but they will have a liability to repay. If a business owner fails to meet their commitments, the creditor, under particular circumstances, may force the business into liquidation.
Another method is to fund your business by raising equity finance (including venture capital, angel investment, private equity and to some extent, mezzanine funding. Using equity funding, a business is required to give equity (a stake in the company) to the investor(s) in return for up front cash which is injected into the business. In the case of equity finance, there will be no liability to repay this money to the investor. After getting equity, the owner is liable to transfer a section of ownership of his/her business. It may entail losing a portion of control over the company as some shareholder rights / voting rights may be transferred to that investor.
Sources of Equity Finance
There are numerous sources of equity so you can consider one source as per your convenience:
Bootstrapping is essentially where the cofounders or company directors use their own cash to initially grow the company, test whether a concept or product works and will sell, and get the business off the ground, allowing that business to fund itself. With the growth of the business, the company can focus on growth. In many cases, owner bootstrapping is an excellent starting point for financing a business initially. The sales in different pipelines could be sufficient for the business growth. It can be a reliable method instead of selling a part of your company.
2. Family and Friends
In several situations, family and friends can offer debt or equity funding. It can be a good source, but it’s important to be careful because selling a proportion of your business can pose challenges around business ownership, particularly if the business doesn’t work out. Before taking equity or debt, it’s important to understand and acknowledge the true potential risks with your investors or new shareholders.
3. Angel Investors
These are affluent people willing to invest their money in your business. These investors are forming investment groups to spread the risk. You can find local angel investors by searching online or contact a regional chamber.
Sources of Debt
If you are confident to repay the debt on time, you can try the following debt options.
4. Lenders of Small Business
Numerous organisations lend to small businesses. Small businesses account for around 50% of GDP and are a huge driver for economic growth. Typically, lenders charge interest on money lent (debt), and will assess the creditworthiness of a business to determine whether it’s viable to lend to that business. Find out more about business loans here.
5. SBA Loans
You may find numerous small commerce administration programs in your areas. These loans need a particular guarantee for the repayment of the loan. These may allow your business to get sufficient loans from customary lenders.
Loans for small business organizations are available with traditional banks. They will need your track record and assets for the security of investment.
You can increase funds for your business by taking contractual jobs. For the security of payment, the contractors can get the shelter of Umbrella payroll.
Not sure? We recently wrote a post comparing debt finance and equity finance, putting them side by side to see which financing types fares off. Read more here