Small businesses face several challenges, including limited funds. While this can be a challenge to deal with daily, it can also present opportunities for growth and expansion. If you find yourself in the position of devising new ways to raise capital, or if you’re already trying to fund your small business with an established line of credit, some steps can help ensure your funding stays safe:
Know the Difference between Debt and Equity Financing
The difference between debt and equity financing is that debt financing is a loan, while equity financing is an investment. Debt financing is more expensive than equity financing because the lender must be compensated for its risk of not getting paid back. Equity investors are not entitled to interest on their investments in a company. But they’re only entitled to what’s left over once all the other bills are paid.
While many small businesses opt for a loan when they need money, it’s essential to consider whether you’d instead go with an equity investor (or both). Here are some things to consider before deciding which option would work best for your business:
Debt Financing
Debt financing might be better if you have an established business model and customers who already know about your brand. With this type of funding, banks will want documentation showing that there’s enough profit each month so that they’ll be able to collect interest payments on their loans—and will also want collateral like property or equipment as security against defaulting on those payments.
Equity Investors
Equity investors tend towards newer companies with excellent growth potential but less financial history than larger businesses do. These investors aren’t looking so much at past performance as they are at future projections regarding how much revenue can be generated by a given product or service over time. And how much profit will ultimately be from those sales figures once all costs are considered?
Consider Every Option
You’ll have many choices when it comes to funding your business. The first step is to consider all of them. Your best option might be a bank loan or a small business credit card. Or maybe you’re better off with a crowdfunding campaign or private investment technology.
Whatever you choose, make sure it’s an investment that fits into the overall plan for your company. And one that will help you achieve your goals while minimizing risk and increasing control over your project.
Know Your Investors
Investors provide capital to a business in exchange for an ownership stake. They may be lenders, who offer money in exchange for interest payments, or partners, who provide capital and share profits. While there’s no single definition of an investor, it’s essential to understand that investors differ from lenders because they expect a return on their investment rather than immediate repayment of the principal amount borrowed.
Make Sure Your Idea Is Watertight
To protect your funding, you must ensure the idea is watertight. By doing this, you will be able to ensure that you have a strong foundation for your business. If the concept isn’t sound, it will be difficult for you and your team to develop it into something reliable and robust enough for investors.
Make sure that you have a good plan in place which outlines how all of the pieces of your business fit together. This includes understanding who makes up your team, their roles within the company, and any other players involved in bringing an idea to life (such as manufacturers).
It’s also important to understand what resources are needed now versus in the future and what money you might spend on marketing campaigns or advertising costs (if necessary).
Pay Attention to the Future
As a small business owner, you must ensure the company has enough cash flow to fund its growth and pay its employees.
This is what business experts call “forecasting.” It means predicting where you think money will come from in the future based on what resources are available now. Suppose a large client has been promising payments over time but hasn’t yet paid as much as expected.
In that case, your forecasting needs improvement because these delays could affect other parts of your business plan—and ultimately hurt profits down the road.
Conclusion
Raising money is hard. Keeping it is much more difficult. If you want to protect your funding, you need to ensure that the people who gave it to you are happy with their investment and won’t pull out any time soon.