Boast specializes in tax credit automation and has experts that can advise on common forms of funding and funding sources for businesses.
Oh, the joy of starting or continuing with a business that needs money or funds!
Yes, it’s a tough road to walk, but certainly inevitable if you are in business leadership. If you have a small business or help to lead a larger entity, funding quickly becomes part of the common stress that you feel—and the common problem you must solve.
Great business leaders come from many different backgrounds. Some are financial leaders with a background in the ‘language of business,’ (Warren Buffet) and others are steeped in a product, engineering, or customer background. Regardless, all must deal with funding and finding funding sources.
This article will delve into the 10 common funding sources to help your business find success with its capital needs.
Types of business funding and sourcing:
Small Business Loans
Perhaps the most commonly known funding source is a small business loan. These are relatively easy to obtain and can be a great source for small business development. To improve cash flow, you can secure funding from financial institutions as a small business loan.
This is an agreement between you (or your company entity) and a bank, credit union, or other capital funding where you pay back the loan (or loans) over a set period of time. The funder may provide the load once assessing the health of the business by looking at cash flow, receivables, revenue, expenses, profits, etc.
These banks or financial lenders may ask for collateral, such as another signer to guarantee the loan in case of default, or ask for assets to stand as collateral, such as receivables or real estate, or other assets.
How to get funding for a business or funding for start-up businesses with small business loans depends on what you can bring to the table from a risk profile, and then the applicable terms from the lender. Apply to your local bank or credit union, talk to a loan officer and see what they say. That is a great starting place.
Your family members can provide funding or funding options to give enough money and be a viable option for your new business. But you should understand the ancillary risks and other considerations to make this work.
Three things to consider:
- Have everything written up in a simple contract by an attorney who can help both sides understand risks and expectations. and also set terms for repayment, default ramifications, etc.
- If things go wrong and you cannot pay it back, are you ready to see that person at family gatherings and events?
- Although it may be easier to obtain, ask yourself, why is that the case. If a bank or other institution won’t give you the funding, should family (especially kind-hearted, perhaps less business savvy) family members give you that money? The risks may be much higher for them!
An angel investor is a person (or small group) that typically invest in early stage businesses. They understand the risks, can evaluate their potential and can often provide advise and connections to help you accelerate your success.
Your high growth potential is tied to your network, ability to execute and cold, clinical understanding of your situation. Angel investors are good at partnering with you on all of these areas. They provide resources, money, research, friends, programs, services, financing, investment, focus, and other ways to help you expand your program or grow faster.
Look for a local angel investors club or organizations that can help you, or ask successful entrepreneurs how they got started and who they know as angel investors, or those who invest their funds in a business.
Venture Capital Investors
Venture capitalists are those who take other people’s money (sometimes their own, too) and invest it into ‘ventures’ (businesses) at an early stage. By their nature, they typically are not dealing with angel (very early stage) investments very much, but instead focus on corporations that are ready for high growth or have high growth potential.
They expect ownership stake in the business in exchange for their investment. They want profit but also understand that may come later. They want to be involved in helping the business succeed, but they don’t want to operate the business.
Funding opportunities for small businesses from venture capitalists for startup companies may be better accommodated by angel investors whereas for later stage or high growth companies a venture capital investment may be better.
A type of venture capital is private equity. This is a lender that takes an ownership stake in your business in return for capital, and they do not want to operate you business, but they seek out businesses that are closer to profits and have a strong business plan and business ownership structure.
Your financial statements and financial projections must be accurate for them to assess your business development opportunity. This type of lender can be synonymous with equity financing or equity funding.
For entrepreneurs that research the industry, are ready for more capital, want the benefits of an expanded network, seek money and resources, this option can be viable. They can fund your business in several ways, such as a loan you must repay, debt financing, debt programs, equity financing, money in exchange for stock or ownership, and more.
Organizations that have equity financing needs can seek out debt funding sources. Debt funding / financing is an alternative to a bank loan for a business owner. As a means of funding, debt financing can be practical and quick. It usually requires assets or collateral, and takes the form similar to a bank loan where the borrower (you) are obligated to pay the funding back.
The term (payback period) may vary, and the details may be negotiable or be flexible. In other words, it may be possible to work with your debt financing lenders to make accelerated payments, or stretch them out, or draw only required amount when you need them and pay back when easy for you.
Why is debt financing good? This helps you keep resources in check, interest in check, and not give away too much equity, all while you keep the doors open. In exchange for this investment or money, you will have to offer regular updates and transparency (even ongoing research) to keep a certain percentage or use their information technology to keep the investor happy and informed.
Your local or regional bank is a traditional place to explore when considering funding sources. The interest, funds, financing, and investment you can get from a bank and bank loans can provide needed money to your company.
Banks don’t typically offer many other business services that you may need from other funders, but getting access to money for your company could be simplified if you have a good business plan and show any personal investment you have already made.
Bank equity financing or equity funding for small businesses is best sought by meeting with your local or regional back officer to determine their requirements. No equity is usually traded for their loans or funding but repayment schedules and other terms are exchanged.
R&D Tax Credits
The United States Government provides small businesses and companies cash or credits for innovation investments in exchange for a company continuing to invest in innovation.
These government programs have been formally made permanent in the U.S. in 2015 and also in Canada that same year. The Canadian R&D tax credit program is known as the Scientific Research and Experimental Design (SR&ED) program and it is very generous. Companies can receive up to 64% of their qualifying expenditures back in the form of a tax credit, or cash back.
Research tax credits are a great way to supplement your cash flow runway, borrow less from friends or lenders, expand your capital on hand, help your company grow, and bring on less debt.
Calculating R&D or SR&ED tax credits for your company or companies
Use the calculators for both R&D tax credits (U.S.) or SR&ED tax credits (Canada) at the Boast website to better understand what you can expect, get early access to your expected refund through Boast QuickFund SR&ED financing, or read more about tax credits at the Boast Resource Center.
Grants are a form of funding that does not require you to pay back to allocated funds. Like R&D tax credits, this is an ideal form of funding sources for companies that don’t want debt but need funds.
There is no interest charged with free grants funds, which is ideal for companies and owners wanting to keep equity funding costs as low as possible. These are hard to obtain, given that these programs change and move from quarter to quarter or year to year.
Look at official government grants sources locally (state or province,) or federally, and see what programs you may qualify for. There are many grants programs including those that help small businesses, minority owned business and industry-specific businesses.
If you want to court a casual investor for their capital and where (usually) no debt is accumulated, a crowd funding options may be something for your company to consider. This is a newer form of funding, and is found on crowdfunding sites online.
The sites charge a fee or percentage of amount raised, and the funds should be used only for the stated project. Marketing your project and the funding site will be up to you, so consider how engaging and attractive your idea is before banking your hopes on a bunch of free money from strangers.
What’s the best capital best for your company?
Choose carefully the one or several funding source avenues that you want top pursue and which would be right for your company. The capital and investors you bring on, the interest you pay all have an impact.
If its venture capital (funding from venture capitalists), private equity, family investment, angel investment, each has a pathway you should understand before delving in.