How does Business Funding Work?

Whether you’re kickstarting your very first business to raise money or are an established entrepreneur business owner, you’ll likely need some source of funding in order to get your business up and running. Unless you have plenty of savings stored safely in a bank or money from your family and friends, you’ll need to look at different types of business funding to find the right solution for your needs. You’re essentially looking for someone, or an entity, to invest in your ideas to help you get started. This could be to launch your business off the ground, or it could be to fund new ideas for your existing business to grow.

Funding can seem difficult to come by, but good news, in this article, we’re going to take a look at some of the pros and cons of funding to help you decide if it’s the right choice for you.

How Does Business Funding Work?

The concept of business funding is simple; you create a pitch for your idea, you go to various sources of funding and you present your ideas in a way that encourages them to invest in your business. While the concept is straightforward, you also need to understand that there are a couple of important considerations to keep in mind when approaching a bank or an investor with your ideas.

For instance, you need to have a deep understanding of your business idea before even thinking about pitching it to someone else. You need to know your pitch inside out and be prepared to answer any questions about it. If you’re overly optimistic about your business plan, then you might be surprised when an investor shuts it down because you haven’t considered all the challenges that you might face.

Unless you’re a startup looking to kickstart their idea, you’ll likely turn to business venture capital funding when you need additional capital for something to grow your business. This could be going through funding stages to fund the development of a new project, to purchase more inventory or to refinance an old debt that’s becoming expensive. You might also consider expanding your business with additional branches.

Types of Business Funding

There are many different types of business funding that you can rely on. However, each type of business funding has its own pros and cons. Picking one will generally depend on your goals as a business and your company’s current status.

  • Term Loans – The most traditional source of business funding that usually comes from banks and investors. This is best for established businesses with a good track record and a strong credit score.
  • Equity Funding – While most forms of funding involve some kind of debt, equity finance funding is different because you’re giving angel investors and seed investors a share of your company in exchange for funding. These deals are often discussed with the investors themselves and it can range from a small 2% ownership of the company to a large majority share that essentially gives them control of your business.
  • Business Credit Cards – These are convenient sources of business finance funding that are good for smaller purchases or startup businesses with no previous history to rely on for larger loans.
  • Invoice Financing – This is a unique form of business funding that allows you to borrow money based on payments that are due from customers. This is a good way to improve cash flow and grow your business if your main income is from invoicing customers.
  • Equipment Financing – A specialized type of business funding that focuses on purchasing or borrowing physical assets such as heavy machinery.
  • Grants – Grants are geared towards businesses that are focused on specific goals in certain industries. These are more challenging to achieve because it requires you to prove that you can achieve that specific goal. This is a common form of government business funding.
  • Crowdfunding – A modern form of new business funding that is best designed for business-to-consumer startups that have a strong idea but a lack of funding. It focuses on asking consumers to invest in your business idea in exchange for the finished product or service that you’re developing. This is a popular option for small business funding.

As you can see, there are many different types of business development funding that are suitable for a range of different company sizes and goals. Picking the right one can be the difference between successfully receiving your funding and failing to make an impact. Be sure to plan ahead with your business funding needs and create a pitch so that it’s easier to convince lenders and investors to fund your business ideas.

Pros and Cons of Business Funding

It’s difficult to list a full set of pros and cons for business funding because it depends on the type of business that you’re operating and also the source of funding that you’re planning to use. For example, a traditional bank loan offers low-interest rates and can help you build business credit, but they require long wait times and a lot of paperwork. Similarly, research and development tax credits (R&D tax credits) are a fantastic government incentive geared towards innovative companies, but it requires a lot of planning and convincing to be able to pull off.

In most cases, the cons of business funding revolve around debt or ownership of the company that you have to give up. When considering business funding, you need to think about what you’re giving up in exchange for funding and if you can cope with those consequences. A small equity deal might not seem like a big sacrifice, but do keep in mind that these deals are complicated and will eventually result in a large portion of your company’s profits being shared with several investors. For crowdfunding, you need to be able to live up to your promises or your reputation will suffer, potentially putting an untimely end to your entrepreneurial career.

As with anything business-related, it’s vital that you do your research on each type of business funding and look around for deals that you can benefit from. It can be a fantastic way to get your business running or to help you develop new products, but you can’t ignore the challenges and long-term commitments that it comes with.