Finances are a perpetual challenge for small businesses. Whether you’re just launching your company, looking to expand or facing a cash shortage, at some point, most small businesses will need to pursue financing.
The question is: which type of financing is right for your business? Some of the most common options include:
Friends, Family and Yourself
About 82% of startup funds came from family, friends or the entrepreneur in 2013, according to Small Business Trends. About 77% of small businesses used personal savings to finance the company’s launch.
Financing from friends and family is actually one of the most common ways small businesses get the finances they need to launch. Try branching out beyond your immediate circle when exploring your financing options. Talk to acquaintances or anyone else who may be interested in your startup.
Personal Loans or Credit Cards
Small business owners are generally taught to steer clear of personal loans and credit cards when financing their businesses. However, the Small Business Association (SBA) says entrepreneurs receive three-quarters of their funding from personal loans and credit cards.
There are safe unsecured lending options, and if you have good credit, you may get a favorable rate on a personal loan.
If you’re having cash flow problems, a credit card may be a favorable option. Entrepreneur Neil Gottlieb, co-founder of Three Twins Ice Cream, told Entrepreneur magazine that he used credit cards to keep the business up and running during an economic downturn. Gottlieb offered one bit of advice for entrepreneurs using credit cards: pay the balance in full each month.
If paying the balance in full isn’t an option, it may be better to choose a different financing route.
Small Business Loan
Small business loans are the most common way to get financing for a small business. The SBA offers loans through commercial lenders. They do not offer loans directly, but they do offer a partial guarantee and work with lenders to lower the risk.
The SBA is just one option when it comes to small business loans. Do your research to find a loan with terms that fit your business needs.
If you’re just launching your business or looking to expand with a new product, crowdfunding may be an option for you.
Platforms like Kickstarter and Indiegogo allow entrepreneurs to put their products in front of a massive audience. Users contribute to the campaign, and are typically given something in return (a special reward or the product itself).
If you choose to go the crowdfunding route, make sure that you read and understand the terms of the campaign. The platform will typically take a percentage of the contributions, and there may be rules for withdrawing funds.
When comparing your financing options, it’s important to think carefully about the ultimate cost of borrowing. Interest rates will vary from one financing vehicle to another. For example, a small business loan will typically have a lower rate than a credit card. Keep these additional costs in mind to make an informed decision on your financing.