Whether you are just getting started or have been in business for a few years, every business at some time will need some financial help. You might outgrow your space, your equipment may break down, or maybe you want to invest in infrastructure. No matter the reason it is nice to know that you have options when it comes to financing your business.
There are four main options when it comes to financing your business which include cash, gifted funds from friends and family, investor funds, or borrowed funds. Each of these options contain their pros and cons and today we will go over them so you can determine which is best for you.
Cash
A young business might not have cash as readily available as a mature business does. Even if you do have the cash, you may not want to rush into spending it without first considering the following pros and cons.
Pros of using cash:
- You do not need to pay interest
- You do not have to give up any equity in your company
- You do not have to mess with paperwork or tracking payments
- It does not affect your credit
- Cash is a liquid asset so you can use it when you need it
Cons of using cash:
- Cash represents your working capital and is necessary for daily operations and emergency funds. If you delete your cash too fast, before a bump in the economic road, you might find your financial hands tied.
- Cash is a scarce resource. It is quickly deleted and takes time to replace.
Gifted Funds
Having a network of family and friends that is willing to support your business is a great thing. However, there are some things to think about before you go ask them for help.
Pros of using gifted funds:
- Peer-to-peer lending networks make it easy to tap into family and friends’ financial resources.
- Little to no paperwork needed.
- They have a vested interest in your success.
- You can accumulate enough small donations to reach a sizeable injection for your business.
Cons of using gifted funds:
- Your family and friends may not be able to provide enough money to fit your needs.
- Informal arrangements can backfire, even among family. Monetary obligations can strain some of the most important relationships in your life.
Investment
Investors are like a double-edged sword and might not be good for every business.Pros of seeking investors:
- Investors can provide a fast and sizeable injection to help push you over the hump to that next big level.
- Investors are keen on making sure their investment was worthwhile so they will bundle their expertise in the deal.
- Peer-to-peer lending networks make it easy to tap into family and friends’ financial resources.
Cons of seeking investors:
- Investors tend to be focused on product-oriented businesses, so if you have a service-based company you may not be able to get investment.
- You have to give up equity in your company. You might need to compromise your brand vision by adding another person to be invested in your company.
Borrowed funds
- Many businesses in need of funds jump to the lender option first. This is the most popular option when it comes to securing funding.
Pros of borrowed funds:
- There are many options available including traditional banks, government programs, micro-lenders, and more to help businesses no matter what stage they are in.
- You can choose between a line of credit or a loan for a specific project or investment.
- You can have complete ownership of your company.
Cons of borrowed funds:
- You have to pay interest and make regular payments which increase your monthly expenses.
- It is a long process requiring lots of paperwork.
- It affects your credit.
- You might need to put up collateral. If you default, the bank will seize all assets.
The Bottom Line
There is no one size fits all option to secure funds for our business. Before you stick to one option or the other, make sure that you weigh the pros and cons above and decide what is best for your business.