What is business finance?
Your new business idea is ready to go. Or maybe you’re ready to grow your current business. If you don’t have the deep pockets to finance it yourself, you’ll need to find the right small business funding. But where, exactly, do you start?
Your business financing options
Most small business funding falls into one of two categories:
Debt where you borrow an amount of money and pay it back, usually with interest
Equity finance where you get funds by selling a share of your business to investors
You may end up with a mix of debt and equity finance. Bear in mind, too, that there are many types of finance within these main categories.
What’s the right type of funding for your business?
Some types of funding are faster to get than others, some require more security, some are cheaper, some come with strings attached. You need to know what type is going to be best for your situation.
It’s important to find funding that fits. You have a business to run. You don’t want your financial arrangements to get in the way. They should be a sail not an anchor.
Seven questions to ask yourself about getting business Finance
Before you go knocking on doors, there are a few steps you can work through to help you pick the right type and quantity of funding:
What are you funding? Is it a startup? Are you buying a business? Or expanding an existing one? Are you looking to solve a cash flow problem? Some types of small business funding are better suited to different needs.
How much do you need and what will you spend it on? Knowing how much you need, when, and what you’ll spend it on will narrow down the best option for funding. Check out the next chapter on how much to borrow.
Are your finance needs short or long-term, or both? You may need short-term finance to get up and running, with longer-term finance to keep you afloat through the first couple of years. You can go to different places for each.
How risky is your business? A proven business idea might make attracting some types of funding easier. But there are options out there for innovative business concepts. Can you find out where your competitors get funding from?
What’s your history with business (or even personal) finance? An existing personal or business relationship with a lender or investor might make it easier to get money – as will a good track record in business and of paying back debts.
What will it cost? You can’t get finance without it costing you or giving something up. You’ll either pay interest to a lender, or turn over a share of profits to an investor. How will those costs add up over time?
Is it worth it? Once you’ve figured out the cost of the finance, make sure it’s worthwhile. Will the extra cash bring enough of an uplift in earnings or quality of life? In other words, what’s the return on investment (ROI)?
Some funding fishhooks
Some business financing options might not be available to you.
If you’re fresh off the blocks, traditional lenders might be reluctant to take a chance on you. They can’t see your past performance or judge your skill at running a business. And if you have no assets to put up as security, it will be difficult to get a large loan.
Equity funding isn’t an option for sole traders. If you want to sell shares, you’ll need to be a company (although you can sell an interest in a partnership).
Don’t give up though. There are a range of business funding options available, and being clear on your needs will help you find the right match.
The first in a great guide to financing your business from Xero.