As the future owner of a small business, you’re probably aware that many small businesses don’t survive their first year. There are many reasons for this. Some don’t have a sound business plan, others lack the infrastructure or are disorganized, while others fail at properly marketing their products.
However, the most common reason why many new businesses fail is because of inadequate financing.
Without financing, your small business may not be able to meet its operating costs, especially when there are unexpected expenses, such as high variable costs or payment delays. Inadequate financing can also prevent your company from taking advantage of lucrative business opportunities, like an unexpected spike in demand.
#1 Traditional Bank Loans
Most people turn to traditional banks for loans when starting small businesses. These are usually cheaper than other types of loans such as overdrafts and credit card loans. Unlike a venture capitalist or an angel investor, a bank may not put as many limitations on the loan. You can use the loan to buy new equipment, try a new marketing strategy, or experiment with a new product.
Unfortunately, bank loans are difficult to acquire. While a venture capitalist or an angel investor may risk financing your small business if they believe in your business plan, a bank is unlikely to do so on instinct alone. A bank will require a history of profitability, which is nearly impossible for a new business. Even if you have a history of profitability and good credit history, a bank may demand collateral.
Bank loans can also be time-consuming. Not only can it take months to qualify for a loan, but it can take a long time for the bank to deposit the funds. If you need the funds urgently, then a bank loan may be an impractical option.
#2 Unconventional Funders
More small businesses are turning to unconventional funders because they don’t meet the complex requirements of bank loans. There are many choices for small business loans in Canada that may not require a long business history, stellar credit score, or collateral. Businesses with bad credit also have a good chance of getting approved by applying for a smaller loan or offering a personal guarantee.
For example, a business owner with good personal credit can secure a loan when their business is new or has poor credit. Give these unconventional funders a try. They provide a quick response and approve most applications. Moreover, they deposit funds within 24 to 72 hours.
#3 Family and Friends
Although people are usually uncomfortable asking for money, many owners of small businesses secure financing from family and friends. If you’re going this route, then it’s important to keep things professional. Plan your pitch, explain the risks, offer rewards or equity and sign a detailed agreement that includes the loan amount, payment schedule, and business plan. Unfortunately, a disadvantage of securing financing from family and friends is that it can sometimes do irreparable harm to important relationships.
These are three financing options that you can use as the future owner of a small business. Carefully weigh the pros and cons of each and have your financing in order before you begin your venture. If the traditional options seem too rigid, then don’t hesitate to think outside the box.
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