In this article, we’ll do a quick overview of the most common funding options for small businesses and why you might get each one.
Most small businesses default to their most convenient sources of capital to start and build out from there. The two most common sources, to begin with, are a traditional bank loan and venture capital from family and friends.
These are excellent sources to get started, but there may come a time when the need arises for more flexible loan options.
One of the most challenging choices to balance as a small business is fundraising vs. the time spent on business fundamentals. Many companies can get stuck in a trap of looking for the best interest rates and large amounts of funding to get their idea off the ground while letting their actual business sink.
That’s why knowing all your options upfront can be valuable knowledge. For example, it may be worth considering a shorter-term loan at a higher interest rate if it means investing more time in the business and less fundraising. However, the tradeoff can be tough to gauge.
Sources of Funding
Friends and Family
A classic source of initial funding for small businesses is borrowing money at good rates from friends and family that believe in you and the idea.
Beyond a reasonable interest rate, friends and family tend to be much more accommodating when it comes to late payments and flexible uses of the financing. Compared to venture capital, they may take less time and effort to convince to invest and take a smaller share of the company.
Banks are the second traditional way to invest, and they tend to be the least expensive of the outside options. However, they also tend to be the most rigorous and thorough in expecting excellent credit, collateral, or other safety measures on their investment.
They are also slow, and it can be challenging to get through the application process.
The biggest problem with banks is that they have a very low-risk appetite, preferring instead to lend based on conservative financing. As a result, with a large loan from a bank, you often risk the business where the banks can take control.
Short Term Lenders
You can get many different kinds of short-term loans for small businesses to help solve unexpected problems.
You can also get a loan for working capital, which can be used to finance larger projects and renovations.
Often, many small businesses resort to credit cards to handle short-term business expenses. Still, it can be helpful to secure working capital funding from a small business loan lender for larger expenses and better rates.
Choosing Your Best Funding
When it comes to balancing your time and opportunity costs, having a variety of lending options can help your business deal with various cash flow circumstances.
At OnVision Capital®, we’re here to help as one part of a business plan that can keep you afloat during difficult times or times of large-scale expansion.