Three ways to finance a business

You might be thinking, “it’s 2020 and it’s time I finally start that business.” Or, maybe you have an existing business and you want to do some major expansion. 

One of the biggest decisions you will need to make is how to pay for it. In today’s blog, I am sharing three options for financing your business startup or growth plan. Let’s look at the pros and cons of each. 

Incur Debt

You might be surprised that I share this idea first given how often I talk about not going into debt. As much as I don’t like debt, it can be a viable way to build your business. If you don’t take on too much, have control over your spending, and develop a plan for paying it back, you might be successful with debt financing. 

Debt financing will work best in organizations with well-defined business plans and those who have already seen some success prior to incurring debt. 

The pros: The quick acquisition of cash makes it immediately available and the growth more immediate and rapid. You can also better afford to incur growth-related expenses such as hiring people or purchasing equipment. 

The cons: You have to pay it back and often, the first payment is due almost immediately. In most situations, there is also interest in addition to the principal loan, so it will cost you more in the long run. If you borrow from friends and family, no matter what people say, it will always have an effect on that relationship, even if you pay it back in a timely manner. 

Equity Financing

This option is for a larger, established business that wants to expand and includes angel investors, venture capital, and private equity funding from an individual or group of individuals. 

The pros: You don’t have to repay the money and you often get it in one large sum that allows for immediate, rapid growth. Plus, equity investments typically bring in more cash than debt alone. Your business can become profitable more quickly since there is no interest expense, and your cash flow doesn’t suffer from making large debt service payments every month. 

Also, since investors are invested in your business, they want to see you succeed. Many of them bring vast amounts of past experience that can help young companies navigate new territory.  

The cons: most investors give money in exchange for partial ownership of your company and they also require a lot of current and accurate financial information. You will be required to answer a lot of questions about your company, its operations, and planned growth before they consider investing. Sometimes, the partial ownership means the investors will have a say in business decisions. 

Grow with your Sales

What? You want me to fund my business by actually selling something? Yes. Some companies are able to grow through funds they put aside from their sales. They discover a product or service that is needed, they market it well, and they make good sales. 

The pros: This is the most sustainable form of business funding. You can create a steady revenue stream and invest back into your company with the profits.

The cons: This is by far the slowest way to grow as it may take a while to educate the public on the value of what you’re selling. And, you may not end up selling enough to cover your costs until you are profitable. You can suffer from cash flow problems and end up delaying payment to vendors or others while waiting on your customers to pay you.  

Need help? 

Which of these three is the most viable option for you? I can look over your financials and help you decide which is the best decision for your business. Or, if you’ve already secured funding, I can help keep your financial records accurate and timely so you can produce the needed reports or afford the required payments. Send me an email today!