Financing a business can be done using various methods. Knowing these methods can help you get funding that suits your needs. Take note not every method works for everyone. There are four ways to finance your business successfully. Getting information on these methods can give you a better picture of what you need to do.
The basics – Equity vs. debt:
The two main ways to finance a business are equity and debt:
- Equity – selling an equity stake (or selling a part of your business)
- Debt – a line of credit or loan that provides you a specific amount of money that will be repaid within a set period of time
The best solution for you is determined by your requirements and circumstances.
1. Tap Into Your 401k:
If you plan on starting your own business and you are unemployed, funds you have accumulated into your 401k can be tempting. Fortunately, the provisions in the tax code allow you to tap into such funds without penalty as long as you follow the right procedure. Though legally complex, the steps are simple enough. Find someone with experience setting up the appropriate retirement plan and a C corporation to roll your retirement assets into.
Sites like kickstarter.com can be an effective and fun way to raise money for a creative and relatively low cost business. You set a goal for the amount of money you need over a period of time. For example, you can set $1,000 in 30 days. Strangers, family, and friends then use the website to pledge money.
3. Lines of credit and business loans:
These are well-known banking products offered to people who are running a business. In a loan, you are given a set amount of money by the bank to be repaid in a period of years. For a line of credit, a revolving facility is offered to be used when you need it. It is paid back on a regular basis, similar to how a credit card works.
Getting a business line of credit or loan can be a challenge. The bank’s main goal is getting paid. Their preferred payment method is through cash flow generated by your business. With this in mind, they are likely to provide financing to a business with a proven track record of cash generation as well as substantial assets.
4. Credit cards:
These are effective ways of extending your cash flow and providing an effective way to finance a business. Apart from paying suppliers, credit cards can be used to earn certain protections, discounts, or other rewards. Unfortunately, credit cards are directly tied to your credit score.
Cash advances are another business funding source. Majority of credit card companies have limits on their cash advances. They also charge high rates for the service. As such, a cash advance may prove to be expensive, but can be helpful when used as a last resort.
These are four ways to finance your business effectively. Weigh out the pros and cons to find out the one that suits your needs.