How to choose the right funding option for your business
When you're starting or running a growing business, you might need a financial boost to keep operations running smoothly and scale. Instead of seeking out traditional lenders, here are some common ways to raise money for a business and how to choose the right one for you.
When to seek out funding for your business
Determining when and how to raise money for a business is unique. Businesses need funding for different reasons depending on where they are in the growth process.
You need seed money to get started. Every new business has crucial initial expenses. A screenprinting company needs materials like blank T-shirts, while a writer might hire a graphic designer to work on newsletter and website branding. Seed money can pay for these things.
You haven't started generating revenue yet. Once you start to have money coming in, you can direct any profits back into your business. But you won't start generating revenue right away, so additional funding can be a good bridge solution to keep your business going.
You need capital to manufacture a product. Business owners that sell tangible goods need a partner to bring these ideas to life. For example, a purse designer needs a manufacturer to produce their product, which costs money on top of materials.
You have bigger business expenses. Typically, you'll launch a business with your own existing equipment. After your business starts to grow, you might discover you need a nicer camera to photograph merchandise or a faster computer to handle operations.
You can't grow without additional funding. A business might reach the point where they can't scale without raising extra money. For example, you want to hire a freelancer to help with marketing or shipping products or your expenses might be growing faster than anticipated.
How much funding can you ask for?
The amount of funding you pursue depends on your business. Some grants and loans are only available to businesses of a certain size or type. Banks limit the loan amounts they offer.
Just because you can ask for a certain amount of money doesn't mean you should make that ask. You want to take on a realistic amount of debt so you can pay it back without creating financial issues for you or your business.
Create short- and long-term budgets and business forecasts before pursuing funding. Having this information can help you make an informed decision about the money you need and when you can pay it back.
How to choose the right funding option for your business
Choosing the right funding option for your business comes down to several factors.
Whether you've tested the viability of your business: If you're still in the idea stage of a business, you might want to do market research before attempting to raise significant money. At this stage, using some of your own money is often the best option.
If you want your business to be a full-time endeavor: If you're hoping to scale this business into a full-time endeavor one day, slow and steady is a good strategy. Start with personal money and explore other funding options once your business starts growing.
Your comfort level with carrying debt: People who are more risk-averse or in the early stages of building their business might opt for funding that doesn't require repayment.
Your financial need: If your business doesn't need significant capital, then seeking out grants or zero-debt financing might be the most cost-effective options.
Whether your business is generating revenue: If you already have money coming in, your financial needs will be different from other businesses. You might be a better candidate for a loan because you have the funds to pay it back.
Your network can also be a good resource for discussions about funding. Talking to other business owners about their own experiences can be a valuable way to discover unexpected funding sources or things to avoid.
Zero-debt vs. debt financing
As you're looking at funding options, you'll also want to decide whether you want to take on debt. Your options can be split into zero-debt or debt financing.
Zero-debt financing is a broad term to describe an investment that doesn't require you to owe money to another entity, whether a company or a person. This includes bootstrapping and crowdfunding.
Debt financing means that you're taking on debt, or borrowing money, that you eventually need to pay back. Types of common debt financing include loans or money from an investor.
Zero-debt financing is often a good choice for new business owners. But once businesses are more established, zero-debt financing can become more sophisticated and come with more responsibilities. For example, venture capital investors provide funds in exchange for equity in a company.
Pursuing debt financing is a big decision. Loans accrue interest over time, so you'll be paying back more than you borrowed. A loan also often comes with a specific timetable for repayment. Because of these factors, debt financing is often better to take on once your business is off the ground and generating revenue.
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