Small businesses and startups often find themselves struggling to find finances for their projects. However, there are options available to you as a small business owner to help with ramping up the profitability of your company. However, you need to first consider what kind of financing you’ll need and how much you’ll need.
Take into consideration the type of business you’re running, along with the size of it before requesting funds from anywhere. You want to know what you’re working with and how much you’ll need to succeed. There are two types of financing and many sub-finances of these for your small startup.
Equity Financing is Available for Small Businesses
Equity financing means a person invests in your company for a portion of ownership in it. The ownership, in turn, gives the person an equity stake in your company, allowing them to share your company’s profits as you get them. Equity financing is almost never paid back, which is what makes it very different from debt financing.
Here are a few ways that you can apply for equity financing to your small business:
Quick Emergency Financing
In some cases your business may need an infusion of cash immediately. In these instances you often cannot wait long periods of time to get a bank loan approved. Many business owners turn to their personal credit to help keep their operations afloat. Many online websites work with people that are looking for quick loans. These smaller loans are often funded in a day or two but come with a higher interest rate.
Personal Savings
One of the first places people look for equity is in their own savings, including real estate equity loans, early retirement funds, and even profit sharing. If you own a life insurance policy, you can ask your insurer to provide you with borrowed cash from it. This does not terminate the policy, however. After two years of savings, you can look into borrowing from it.
Typically, your life insurance policy will have a reduced face value and, in the event of your death, the loan you borrowed needs to be paid-in-full before your beneficiaries can claim the policy allowance.
Home equity loans are also another popular loan taken out for people. Since most people who own small businesses, also own homes, they are able to take out an equity line on their mortgage line. You can claim funds anywhere between the difference of the value of your home and the unpaid mortgage amount. Therefore, everything you’ve paid toward the loan can be applied as an equity. In the event of anything happening to your home, the bank can seize your home to repay the debt owed to them.
Other resources are friends and relatives and venture capital for equity financing.
Debt Financing
The other type of funding available to you is debt financing. This involves you borrowing funds from a creditor – such as a bank – where arrangements for you to repay are made in contract. Most times, the lender will add on interest rates in order to profit from this.
Debt financing is available in two ways: secured debt and unsecured debt. Similar to credit cards, these loans either require something in collateral for reassurance (secured) and others require nothing but your John Handcock (unsecured).
Use These Strategically to Build Your Small Businesses
Equity loans are easier to take out on your business and they help you avoid the upfront fees of having to pay someone or the unnecessary interest rates offered from debt financing. However, debt financing can be useful when you need a large loan since they are often much easier for larger sums than equity financing. Weigh the options to find the one best for your company.
My parents had a small business when I was growing up. It was very stressful on them at times. When they needed money they would borrow from family and banks. I know the process of getting a loan from a bank can be slow and stressful. I can relate to this article.