If you're running a business, then you know that cash flow is one of the biggest challenges you'll face. The good news is that there are ways to get capital for your business if you need it! In this article, we will discuss different types of financing options and how they can help your company grow.
Equity
Equity financing is the most common way to raise capital for a start-up. It’s when someone purchases shares of your company with cash or a vending in of other assets. This means that you dilute your personal stake (and that of any other founders) in the company in order to receive funding to grow business.
The number one reason why companies choose to go this route? Because it offers more flexibility than debt financing since debt financing relies more heavily on more historical financial information which a start-up typically cannot provide.
Debt
Debt financing is the act of borrowing money from a lender in order to inject capital into your business. You're probably familiar with debt as a concept: it's what you might owe on student loans, credit cards, and small lines of credit. Debt financing is similar in that it requires repayment (with interest and principal) but differs in that its repayment is usually secured by some form of collateral. Lenders may ask for collateral when they grant a loan because if the borrower doesn't pay them back, they can take the collateral instead of waiting for their money.
There are two types of debt financing: secured and unsecured loans. Secured loans involves using an asset as collateral to cover the loan amount—so if the borrower doesn’t pay back the loan amount plus interest within a certain timeframe, the lender gets to keep whatever was used as collateral until it has been fully repaid. Unsecured debts do not require any kind of collateral from borrowers; however, these loans often come with higher interest rates since lenders have less protection against defaulting borrowers compared to those who take out secured loans (such as mortgages). Unsecured loans are typically lower dollar amounts, to prevent the lender from being exposed more than they are comfortable.
Convertible debt
Convertible debt is a type of loan that can be converted into equity at a specified price in the future. A lender will convert their debt into equity based on specific timelines and milestones. This type of debt can be enticing for both the borrower and the lender as it adds a level of flexibility that isn’t typically offered by banks and most alternative lenders. If converted, it allows the company to seek other conventional debt options (as mentioned previously), to continue to aide in the growth of the business, without having too much debt on the balance sheet.
Negotiating for a convertible debt loan requires more of an understanding of the capital table of your company, having a clear path towards profitability and growth and understanding how much capital you will require over an extended period. Securing convertible debt incorrectly or at the wrong time can make it more difficult to source additional capital later.
Small business grant (or local grant)
Grants are typically awarded by nonprofits and government agencies. The application process can be lengthy and requires much attention to detail and an acute understanding of your financial health. Preparation is key.
Grants are often awarded to small businesses. If you're just starting out, this could be an excellent option for you.
You will need to contact multiple organizations in order to find the right fit for your project. Many organizations help with sourcing and applying for the right grants, but they also have their own requirements that must be met before they provide funding (such as a specific deadline or minimum amount of money requested).
Conclusion
Whether you’re looking for capital to get started, or growing your business and in need of more funding options, there are many ways to get the money you need. At the end of the day, it all comes down to how willing you are to do research and find what works best for your company. Working with The UnBankers can alleviate some of the stress of doing all the legwork yourself. Our team are seasoned financiers with operator background so we understand the pressures of running a successful business.