There’s a lot to consider when starting a business. Any good business plan should include finance options to get the business up and running. But which is the right one?
What’s the best way to fund a new business? If your answer is to get a small business loan, think again.
Unfortunately, most new businesses will need some outside funding to get off the ground. The good news is that there are many types of loans that fit the bill.
Before you can pick the right kind of financing, you have to look at why you need the money. For one, unpacking your expenses will give you a good idea of how much money you need. It will also help you look for the right loan.
Below you’ll learn about your most likely expenses and what your best options are to fulfil them.
Common Expenses for New Businesses
There’s a lot of variance in the amount of money you might need. But most businesses share similar expense patterns at startup. These are some of the most common.
You’ll probably need money to develop your product or service. This is a big consideration for tech startups. For many, their existence is contingent on developing a product.
There will also be operational expenses. These cover everything from leasing space to meeting payroll requirements. Also, remember that you will have to pay yourself a wage. If you rely on your new business for a livelihood, you’ll need to work that into the expenses.
Another big drain on your resources will be marketing. As soon as or before you’re ready to start selling, you’ll need to market your company and your product. There are many good options, but few of them are free.
Finally, there are always unexpected expenses. It’s inevitable, even for experienced business owners. It’s almost impossible to make a perfect estimate of your financial needs. So, you’ll have to mitigate that uncertainty.
How to Pick a Loan
These are the criteria for choosing startup business loans. Part of your loan application process will be deciding on the most favourable one.
The first and most important thing to consider is how much money you’ll need. That’s where all those previous points come in handy.
Not every lender will have options available to cover your needs. Conversely, some may have higher minimums than what you can reasonably borrow.
The other factor is how you structure the loan term. To repay the loan, you need to work it into your budget and decide how long you can bear that expense.
Lastly, you’ll need to decide whether you need a lump sum or a line of credit. They will have different long term implications.
To get reliable cash flow, a line of credit is better but a lump sum could give you better terms on the loan.
Once you have a rough idea of these three things, you can move on to the details. Interest rate, credit history, and other eligibility criteria will come into play when you begin the application.
It’s time to explore the financing options.
Types of Financing for New Businesses
These fall into two broad categories, debt finance and equity finance. Debt financing is a more independent approach, while equity financing involves outside stakeholders.
Traditional Lending
Business owners have relied on banks and credit unions for start up business funding for centuries. It’s still a good option, provided you’re eligible.
The process is almost always long and you’ll have to provide extensive business plans.
To speed up the process considerably, you can opt for an unsecured business loan. This type of loan requires no collateral but may have less favourable interest rates.
Angel Investing
This involves convincing individual investors to finance your business. In return, you’ll likely have to give up a stake in the business. Many people find great success with the right angel investor.
There is any number of big success stories from angel investors.
Back in 1998, a technology company was looking for investments. They were developing a new search engine and had big plans for the future.
They managed to secure an angel investment of $250,000. The investor paid six cents a share for the company stock.
That company was Google, and one of their angel investors was Jeff Bezos, of Amazon fame.
Would Google be as successful today without that investment? We’ll never know.
Credit Card
It’s not very fancy, but it gets the job done. If you’re starting a small business, a credit card could be your best option.
There are almost always introductory offers on credit cards. If you can get a line of credit with 0% interest for 12 months, there’s no reason not to take it. You’ll just need to make sure the credit card can cover your needs.
Venture Capital
This equity financing option usually comes from institutions that specialize in risky investing. It’s similar to angel investing but there is a clear obligation to show returns.
The venture capital investor receives shares in exchange for the investment. Most venture capital firms will require you to show solid business planning and future revenue projections.
You won’t have to provide any other collateral so this type of investment is much harder to get.
Alternative Lenders
These days, it’s easy to apply for a business loan online. There are many alternative lenders that can provide a variety of loan terms.
That’s what we do at Unsecured Finance New Zealand. We understand how important access to cash is for a new business. That’s why we work closely with clients to find a solution that fits their needs.
Public Float
You can list your company on a stock exchange to try to secure funding. However, it will need to be a public company.
Doing this entails a complicated series of measures to ensure transparency. It’s the right choice for some businesses, but not too many that are just starting out.
The Right Financing Makes All the Difference
It would be a shame if your idea didn’t get off the ground for lack of funding. To give yourself the best chance, be methodical.
Put together the information you need. How much capital, when can you pay it back, and if you want a lump sum. Then, look at your options, and go with the one that makes the most sense.
When you’re ready to take the next step, we’ll be there to guide you. Visit our website to go over your options. Or, fill out our online form right now. It will take less than five minutes to start moving toward your future.
