Financing Options Every Business Owner Must Understand

Finding money to operate your small business isn’t always easy. Many business financing options have different purposes. The key to successful business management is in building a portfolio that meets your company’s needs. You make the best decision when you understand loan options.

Family and Friends

Your family and friends may provide seed money to get your business off the ground. Make sure you understand if they are providing a gift or a loan. If they are loaning you the money, document the repayment terms. Others simply want to support you through this challenging process and provide moral support or advice.

Savings Account and 401(k)

Business financing lenders require that you use available savings to demonstrate your commitment. Try to leave yourself a personal emergency fund in place. An early withdrawal from your 401(k) is costly. Before you make the withdrawal, ask your financial advisor about taxes and penalties.

Credit Cards

Credit cards help you through a short-term cash flow challenge. You can use the credit card to purchase needed items. Pay off the bill on time to avoid paying excessive interest charges. Reward cards give you benefits for using them.

Crowdfunding

You can set up a crowdfunding account to request investments from individuals. There are several business financing models with crowdfunding. If you plan to use this method, make sure to establish the type of investment you accept.

  • Debt donations are loans; you must repay the loan, plus interest
  • Donations are gifts of money; the lender does not expect repayment
  • Reward gifts are given to lenders; rewards range from promotional materials to product discounts
  • Equity funding gives a portion of ownership to the lender; you determine the ownership percentage and rights of the lender

Business Partnerships

Other successful business owners make excellent business partners. You would draw up a partnership agreement, a legally binding contract that details to rights and responsibilities of the individuals. You and your partner share a portion of the expenses and profits. You also share decision-making authority with them.

Corporate Loans

Traditional loans are provided by lenders based on your company’s ability to repay them. Even though you are requesting money for your business, underwriters take into consideration your individual credit history when offering the loan.

Taking the time to understand the pros and cons of your financial options is important for every entrepreneur. The more knowledge you have, the better decisions you can make. You will build a more successful business.

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