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As a business owner, it can be a daunting task to determine the perfect financing option for the growth of your small or mid-sized business. Let’s dig into the top five ways of financing: debt, equity, and the latest alternative financing options: crowdfunding, peer-to-peer lending, and corporate cards.
Types of Financing Options Available
1. Debt Financing
Debt financing usually means borrowing money that must be repaid over a period of time, usually with interest and without giving up ownership. Most lenders will ask for some sort of security on the loan in the form of business collateral and assets or even a personal guarantee. Debt financing can include secured loans, unsecured loans, lines of credit, SBA-guaranteed loans, real estate, and equipment loans from sources that include banks, credit unions, and commercial finance companies. For the average small business, debt financing is easier, quicker, and more practical.
2. Equity Funding
Equity funding is a method of raising capital for your company by selling a share of ownership in the business to the investor in exchange for cash. Here, you are giving up some of the control of your business and a part of the future expected returns as well. It is usually the preferred route for certain industries like tech, financial companies, and healthcare because they promise good returns for investors.
Crowdfunding is estimated to grow up to 144.79 bn by 2025. Lots of small businesses are raising money by developing their online brand, selling online services, and generating recurring income. It’s called donation-based or rewards crowdfunding. Comparable to microfinancing, it allows you to solicit small donations to your business or a specific project from several donors, through crowdfunding platforms like Kickstarter, GoFundMe, RocketHub, GoGetFunding, and others. In return, since crowdfunding is based on donations, funders do not obtain any ownership or rights to the project – nor do they become creditors to the project.
4. Peer-to-Peer Lending
Online peer-to-peer lending directly connects you with investors who usually have a diversified portfolio made up of small portions of loans. Since the borrowing criteria are less stringent, peer-to-peer lenders can easily provide loans to small and mid-sized businesses who otherwise may not have access to traditional financing. However, the interest rates are often on the higher side in this option.
5. Business Credit Cards
New-age corporate cards and 0% APR business credit cards can be great assets to any business. For instance, some corporate card issuers offer credit cards without any personal guarantee from a startup business, even if they don’t qualify for traditional corporate cards. They also offer attractive reward programs compared to traditional corporate cards. Similarly, 0% APR cards offer interest-free promotional financing on new or large purchases.
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