Fund your small business the right way
Setting up a small business of your own can bring a lot of rewards however it also requires a lot of work and in some cases a reasonable amount of capital. Unfortunately, not everyone who has a brilliant idea when it comes to start-ups is not necessarily flush with cash.
Unless you have enough in savings, finding funding for your small business is crucial. Whether you’re looking for startup capital, the resources necessary to scale or finance options that can keep your cash flow strong during seasonal dips, a little access to extra cash can be one of the most useful financial tools at your disposal.
Credit cards are regularly used as a source of funding, but they are also easily mismanaged and could lead you and your business into debt. Here, we’re going to look at some of your alternative options. These are five ways to fund your business without a credit card.
Why you might want to consider alternatives to credit cards
Business credit cards can be highly useful. They allow you to make employee expenses easier to manage, help you build the business credit profile, and more. But there are downsides to using them that a small business owner should consider:
- If a small business owner is registered as a sole proprietor, they are personally responsible for debt accrued on a credit card and how they use it impacts their personal credit history.
- There is always a risk of employee abuse, where an employee may decide to use your card for their own personal items.
- They are comparatively very highly priced compared to other finance options, with high interest rate fees and late payment fees.
As mentioned, they can be a great option, but there are consequences to credit card use that can often impact you, the small business owner directly. So, let’s look at some of your other options.
A small business loan
The most traditional method of funding your business is taking out a small business loan. Just like any other loan, this entails getting a lump sum cash payment to help you pay for the assets and resources you need, whether you’re starting up, scaling, or giving yourself some cash flow flexibility.
Most small business owners will think primarily of going to the bank, but there are other lenders out there. For instance, peer-to-peer lending is an option for those who are unable to get funding from the banks, sometimes with competitive interest rates based on how reliable the loan seems. Besides a credit history, having a thorough, detailed business plan put together is going to help you secure that small business loan.
One of the biggest advantages of using a business loan is that, unlike with grants or investors, the lender has no say in how you use your money or operate the business. They’re not entitled to your profits, either, only what you agree to pay back. If the approval is successful, you have immediate access to the cash. Low-interest rates compared to credit cards are also a benefit, especially since interest payments could be tax deductible.
There are disadvantages, however. Commercial lenders tend to follow strict guidelines, which means that the process can take some time. You may also have to provide collateral, such a stock portfolio or real estate, to secure the loan which the bank can then take if you fail to make payments.
The government offers more access to financial grants than most other countries in the world. Getting one can be grueling, with long applications and even longer processing times, all with a chance of rejection. However, to many, they represent a chance that simply cannot be ignored.
Five of the biggest government grants currently available are the Entrepreneur's Programme, CSIRO Kick-Start, the Biomedical Translation Fund, the Export Market Development Grant, and the Research and Development Tax Incentive. As the names suggest, many of these grants are very specific in their purpose and the types of small business to which they are applicable. However, if one of them is a viable option, it essentially means free money for your business.
That’s not to say that government grants don’t come with any strings attached, either. The R&D tax help, for instance, can only be used to help fund R&D. You are bound legally to use grants however they dictate, or you could be responsible for paying it all back. What’s more, it can take some of your time and energy away from running the business and push back your timeframe. For instance, you could about to start a business, but you’re forced to wait months for the grant, only for another startup to occupy the space on the market you were intending to by the time you get it.
Finding private investors
There are other groups and individuals that you can turn to. These are your potential investors. You might look for funding from a lot of different sources. You can turn to friends and family, for instance. You can also look for angel investors, or venture capitalists.
These people can fund your business, often with a catch. Friends and family may be willing to simply accept repayment with interest. However, most investors will instead want a chunk of the business, this includes all angel investors, venture capitalists, or private investment groups.
The upside is that borrowing from private investors can be much quicker than trying to get funding from a bank or a government. Investments aren’t necessarily classified as a loan, so you don’t have to think about payment deadlines, upfront repayments, and similar cash flow issues.
The downside, however, is that you are likely to have to give up a share of the profits. What’s more, depending on how much of the company you trade for an investor’s involvement, you may have high expectations on your growth and pressure to run your business in certain ways in order to meet those expectations. Getting investment from family and friends can strain your personal relationship if there are any concerns over the business, too.
Factoring is a finance option that allows you take out short-term loans based on your accounts receivable. If you know you have the money coming, it’s an easy way to ensure that you get it to spend as soon as you need it.
Two of the most common forms of factoring apply to two incredibly common ways of taking payments. Invoice factoring lets you take loans based on invoices you are in the middle of processing. Merchant cash advances does the same but for credit card payments from your customers.
The advantage of factoring is that it lets you use money that the business is already entitled to. It’s also relatively easy to pay back, as the interest is calculated into the amount of money you’re expecting to receive through invoices of credit card payments. However, the disadvantage is that interest rates are high and they can eat into the total amount you’re receiving quite a lot. Furthermore, how much funding you get is limited by how much you’re making through invoices/credit cards, so they’re only suitable as short-term funding.
Crowdfunding is a recently new funding option, that takes your business onto online funding platforms (such as Kickstarter). Here, instead of a single investor, you make your pitch public to the entire market, and they donate funding to help bring your idea to live.
The advantage of crowdfunding is that you aren’t required to make regular repayments to anyone and you have no investors that have a say in the business or a cut of the profits. However, those crowdfunding platforms tend to take a large chunk of the final amount of money raised. What’s more, there are lots of businesses attempting to crowdfund. Besides having an idea enticing enough to get people to pay for it now (including perks for those who contribute), you have to market hard to compete with other crowdfunding ideas with no guarantee that your efforts will be successful.
Securing funding for your business should be one of the top priorities of any business owner. Without it, you have no spending flexibility and you might have periods where limited cash flow becomes a serious problem. Hopefully, the points above show that you don’t have to necessarily use credit cards. There are other options out there.