Quick Guide To Funding Your Small Business
No matter where a small business starts, at some point in the process it is going to need some cash to help. You may be going through a rough patch, have a problem with cash flow, or even be wanting to grow the business; there can be many reasons for needing an injection of cash. You just need to know how best to go about it as there are a number of options.
First of all there are two ways that you can fund a business: debt and equity. When you go down the debt route, the investor will receive a note for their money, which will talk about the terms of the loan and detail things like the investment. One of the good things about this is that you keep ownership of your company, as it is only cash they have given, nothing more. Of course, the flip side to that is that there is an obligation to repay back the investment according to the terms, and if you fail to do so, then it could lead to something like liquidation.
Then we need to talk about equity. Which is when a business owner uses equity to help fund a business, and it turns over an ownership stake to the investor in return for the cash (think along the lines of Shark Tank, for example). Some businesses can even go from a private company to a public company in order to offer shares, to help their business, much like what this article says, if you check out the blog at SmartRoom.com. The benefit to this is that there is no need to pay back that cash injection, but the investor will own part of the business, which will hopefully help them to make more that they originally put in. So long-term, this can impact what you can earn as a stakeholder.
Bootstrapping
One form of equity funding is bootstrapping, which is where the business essentially funds itself. It means that as profit is made, it goes back into the business to allow more growth. This means that the growth of the company isn’t always quick, but you will not be in debt to anyone.
Self-Funding
Another example of equity funding is by self-funding a business. Many entrepreneurs will put their own money into a business, whether a little or a lot, as they want to get the business up and running. Often, when a small business has shown over time that it can grow, then they can look to other investors to help things to grow more quickly.
Banks
If you are looking for an example of debt funding, then one of the most traditional ones to look at is going to your bank for a small business loan. The thing with this is that they will often need something to secure the loan, or want a proven track record that the business has shown to be a success so far. So something like self-funding to start with, and then a bank loan is what a lot of people will consider once they know how things are going.
