Starting your business, or expanding upon your existing business, can be very costly and if you’re going to need funding for your business or new venture to get off the ground, as many prospective business owners do, you need to see what’s available and what will best suit you and your business. Keep in mind that the first few years of operating a business are always the hardest as you’ll be investing much of your time, effort, and money and that may be before you even start seeing a profit. You will need to consider which funding option will work best for both your immediate start up needs, if you’re a new venture, as well as your longer range goals and needs that you will have as your business grows.

In this article, we will cover many of the common types of funding you can get to help start your business. We’ll talk about the advantages and disadvantages of each method so you have a good idea of which one you’d like to pursue. We are slowly adding in-depth articles for each funding method. There could also be other types of funding that may be more suitable for you as well that we haven’t listed so make sure to do additional research.

Business Loan

Likely the most popular method for raising money for your business, however depending on how much you need to borrow and what your business is, it can be very difficult to get funding. You’ll borrow a certain amount of money (most likely from a bank) over a set time period with added interest on your repayments. The interest depends on the borrowing period, the amount borrowed, and the borrower of course, but the interest rate can change depending on your lender. Normally you will have to show the bank an in-depth business plan along with realistic cash flow forecasts to prove to them that you’ll be able to pay them back with interest. The bank may ask for security against your loan which could be your house, car, etc. This is where you need to be absolutely sure that the business you’re hoping to create will be successful because you may be putting a great deal of your personal assets on the line.

Advantages

  • You can borrow a large amount of money
  • You may be able to pay back the loan early
  • No involvement in the business by the lender
  • You don’t have to share a percentage of the profits
  • They may offer fixed rate loans

Disadvantages

  • Can be difficult to be approved
  • They may have early payback fees
  • You will have to spend time creating a business plan and forecasting figures
  • Interest rates can be quite high
  • If you secure your loan to personal assets you could lose them if you don’t keep up payments
  • If you go for a variable finance rate it can be difficult to know what the interest may be in the future, making it difficult to predict future expenses

Angel Investor

An angel investor will buy a certain percent of shares and then share in the profit or the losses of the company. You could also offer this option to family and friends or even equity crowdfunding. An angel investor will not only buy equity within the business but also offer experience and knowledge with running a business too.

Advantages

  • An angel investor may be able to bring new skills and “open doors” for your business through their contacts, e.g. getting your product into large retail stores or getting your service partnered with another company
  • You won’t have to repay the money or pay additional interest
  • You will have another party to talk through your plans and to offer advice

Disadvantages

  • You will lose a share of your business and lose a part of the profits
  • You can only do this if you’re a limited company
  • You will have to consult with your investors before you make decisions for the business, which they may disagree with
  • If they buy a larger share than you do, then they would have control of the business

If you think a bank loan may suit your business, see our article “Getting a Business Loan” for more details about this funding option.

Remember a small share of a successful company is worth more than all of a company that has failed.

Grants

A grant can be a great way to get funding for your business as you won’t need to pay it back. A grant is normally given to you for a specific purpose, such as to hire more staff or to buy equipment. You apply for grants most often through your national or local government, for example in the UK, you would apply through the EU and your local councils.

Advantages

  • You don’t pay it back
  • You don’t lose a share of your business or your profits

Disadvantages

  • In can be a very long process and you may not being granted the money
  • There is a lot of competition
  • You will have to find a grant specific to your business which might not exist
  • You may have to put up an equal amount of money as they give you for the specific purpose you apply for
  • You may have to show evidence that the money has gone to the purpose it was granted for
  • They can ask you to spend the full amount and then they’ll reimburse you their part once you provide receipts, etc.
  • Most grants are for proposed projects, not ones that are already in progress

Although a grant can be like free money to boost your business, as you can see, there are a lot of disadvantages and most people who apply for grants don’t get them. However if you’re interested in looking more into Grants take a look at our in-depth article Grant Funding to learn more.

Rewards-based Crowdfunding

Crowdfunding has become very popular over the past few years with the help of certain websites, such as Kickstarter and Indiegogo. It’s a way to offer something from your business for monetary donations from a potentially large number of investors until you reach your target amount. Each investor normally contributes a small amount in return for something such as the first release of your product or an item from your online store like a t-shirt.

One of the biggest strengths of this form of crowdfunding is in the potential it has as a marketing tool to gain exposure for your brand and a way to establish a community of supporters for your business. It can also help to tell you if there is an interest and a demand for the product or service that your business is providing.

Funding is crucial for any business, but brand recognition and loyalty are priceless, so don’t overlook the value of using crowdfunding to supplement your funding goals.

Advantages

  • It’s an alternate funding method which can potentially raise a huge amount of money
  • It can be quick and without upfront fees
  • This can also be a great marketing tool and way to build a community around your brand

Disadvantages

  • It’s sometimes difficult to get people to invest
  • If you don’t reach your target sometimes the money can be returned to the investors
  • If your business idea is unique and you don’t have a copyright or a patent then it could be copied and used by others

Overdraft

An overdraft isn’t really a long term borrowing method, but it can be useful if you need money quickly and are able to pay it back, for example after buying stock to sell. An overdraft is normally an amount agreed with your bank where the bank will cover payments made over the existing balance of the business’s account and you will be charged interest along with fees.

Advantages

  • It’s flexible and quick to get
  • You don’t normally get charged for paying it off early

Disadvantages

  • You are charged interest and fees which can be quite high and it has a variable interest rate
  • You can be charged if you go over your agreed overdraft amount
  • You can only get an overdraft with the bank that your business banks with
  • The bank can ask for the money to be paid back at any time

An overdraft should only be used for the short term and you should be certain you’ll be able to pay it off quickly. For example, if you have to buy stock and already have a buyer for the stock, then an overdraft would be perfect if you don’t have the money to buy the stock in the first place.

Venture Capital

Venture capitalists typically make larger investments than angel investors do and they tend to choose certain kinds of industries to invest in, such as technology, computers, and media to name a few. These investors are also often seeking the chance to make a huge return on the money they are going to contribute to someone’s business.

Advantages

  • It is possible to secure a large amount of funding to help you get your business or venture up and running
  • This funding option could possibly be a route for accessing other connections, which may lead to additional backing sources
  • You may gain the advice or insights of these experts, or even find a mentor

Disadvantages

  • The process of being approved by a venture capitalist may be quite stringent
  • You will most likely need to relinquish a great deal of control and freedom to make decisions about the direction of your business

Partner with a potential customer or another Business

This is where you join alliances with another business or a potential customer who is willing to help you with funding for your business in exchange for a royalty of the profits from your business.

Advantages

  • One significant benefit to this option is that your partner likely has a common interest in wanting your business to succeed aside from wanting to make a profit (they are probably in a similar or related field, and if you succeed it benefits their interests in more way than one)
  • You would receive the financing when you need it and only have to pay it back after a specified time once your business is making a profit

Disadvantages

  • The most obvious downside to this is that you have to share a percentage of your profits for a specified time period
  • You may feel accountable to the person or business you have partnered with and even responsible for any losses they may incur if your business does not succeed as you hope it will I’m not sure if this should be included or not, it was more my feelings than anything else.

Peer-to-peer lending

Peer-to-peer lending, also known as peer-to-peer investing, utilizes online platforms and matches borrowers and individual lenders. The landscape of this option has changed in recent years on many of these platforms, moving away from a true peer-to-peer model to more of a corporate-to-peer one however. The interest rates can also be quite high for these loans, which is one downside.

Advantages

  • You may be able to get a peer-to-peer loan fairly quickly
  • If you have less than stellar credit you may still be eligible, although your interest rate may be higher

Disadvantages

  • Interest rates may be very high

Join an incubator or accelerator organization

An accelerator or an incubator can also be a way to help new businesses or even those who are still in the process of developing the concepts of their business to get an initial boost. These organisations basically offer resources such as funds and workspace, as well as serving as a mentoring source in exchange for a small share or profit of the businesses they help. Y Combinator, for example, is an organisation that has helped many businesses to successfully get off the ground in such a manner.

Advantages

  • The key advantage is that you will benefit from the experience and wisdom of individuals who want to help your business become a success
  • You will also receive additional assistance in the form of supportive resources, often at no charge, and sometimes funding as well
  • These organisations may offer you help connecting with investors and securing legal services for your business
  • At a later point, your brand may receive recognition from the organisation for participating if your business becomes successful as a marketing tool for their organisation

Disadvantages

  • This can be a long process, albeit one of learning and growth, but it may delay the launch of your new business
  • You will need to be prepared to share some portion of your future profits with the organisation

Pay for the business yourself

This option may often be overlooked, but paying for the business yourself, also called bootstrapping, has one distinct advantage over all others. It allows you to maintain complete control over your business and all of the profits and assets. However, the ability to save the kind of money that you will need in order to get your business operational may take a very long time, or may not be realistic based on your income and expenses.

Advantages

  • All of the profits from your business belong to you
  • You don’t have to relinquish control to others

Disadvantages

  • It requires you to provide all of the funding up front and as needed

Other funding types are available such as invoice finance which is where a third party will buy your unpaid invoice (normally as a very low rate). There is also leasing and finance which can be used to buy machines, tools, office equipment, etc. and is normally given by the company you’re purchasing from. There are also private equity firms which offer another source of funding and you may want to consider researching this option to determine if it might be a good fit for your business.

Tips

We have presented the primary types of funding that you should consider when starting a new business or adding to your existing business, such as expansion to new premises, which may require finances beyond your reach. There are strengths and benefits to each one, and likewise, they each have factors that may make them a poor fit as well. You need to keep in mind that just as most things in business, it is about researching to discover what will be the right option for you and for the particular needs of your business.

  • Be prepared. Do a thorough analysis of your funding needs.
  • Don’t accept the first offer of funding too quickly, do your research first!
  • Be choosy; don’t accept money from just anyone. Know your lender. You want to make sure that you will have an easy time dealing with them in the years to come.

If you feel that any of the funding options we have discussed would be a good match for your business, then make sure to read the in-depth article for that topic to get a better understanding of what the particular funding method involves. Finally, remember that most importantly, perseverance will pay off in the long run. If you believe in your business idea or new venture, stick with the process of searching for the right funding option – it is out there, you just have to find it.