Starting and growing a business often requires funding, whether it’s to develop a product or service, expand operations, or hire new staff. However, securing funding for a business can be a daunting task, especially for first-time entrepreneurs.
Fortunately, there are many options available to help businesses source the funding they need to fuel their growth. In this guide, we will explore the different ways that businesses can source funding, including debt financing, equity funding, and angel investors.
We will also discuss the pros and cons of each funding option and provide tips on how to increase your chances of securing funding for your business. With the right approach, any business can find the funding they need to achieve their growth goals.
Debt financing works by taking out a loan and investing it into your business, then paying it back with interest. These loans can come from several sources, including banks, mortgages, and credit cards.
The big advantage to debt financing is that you don’t have to give a portion of your company over to a third party for money. This gives you more control over how you run your business and repay your debts. Furthermore, since debt loan payments are consistent, expenses from debt financing are easier to predict than the expenses accrued from other financing methods.
While debt financing may provide you with some benefits, it can also cause a lot of problems. For instance, if you have inconsistent cash flow and can’t make repayments in time, your credit rating will drop. This could lead to difficulties acquiring loans in the future, and thus hamper the growth of your business. Furthermore, the rise of interest rates could make repayments more expensive, meaning the amount of money you lose repaying the loan will increase. Finally, you may have to provide reams of information and documentation on your business to your lender, which is time-consuming and compromises your privacy.
Another option for financing your business growth is through equity. Essentially, you offer shares in your company to a third party for money. However, with shares in your company, the third party will acquire some control over your company.
The obvious advantage of equity funding is that you don’t have to pay off the money you acquire. This gives you more money to reinvest into your business and thus grow faster. Another advantage to equity funding is the connection you develop with the investors themselves. Many of these people and organisations have expertise, experience, contacts, and advice that can help your business prosper.
As previously mentioned, equity financing requires that you give some of your control over your business to a third party. As a result, you will have to consult with them every time you make a decision regarding the company. Furthermore, you will probably have to hire people to communicate with the investors consistently.
Unlike most parties offering equity funding, such as venture capitalists or investment firms, angel investors are individual people who offer to fund out-of-pocket. While they offer several advantages over traditional equity funding parties, they also have their limitations.
Angel investors are typically more flexible than other funding sources and are more willing to provide money on terms that suit the business. Also, if they connect with your mission as a business, they may be more willing than typical investors to take financial blows to keep it afloat. While all investors can provide sound business advice, angel investors are particularly notable for this quality. They are often retired entrepreneurs and executives with decades of experience, and they tend to be extremely well-connected.
Despite the many ways they could benefit your business, they aren’t always the best party to receive money from. Firstly, angel investors generally expect a high initial return on investment. Because of this, they tend to request large shares in the company or a proportion of your profits. This could be expensive for your company, especially if your business takes a while to become profitable. Also, angel investors tend to pull out of businesses that aren’t profitable within the first 3–5 years. This may force you to peruse unstainable growth strategies that will harm your business in the long run.