Having understood that you need funding for your business, you must start looking for finance to give shape to your plans for invigoration and also expansion. But before you proceed to look for funds, you must work out the amount you need. It might tempt you to ask for the maximum funds possible from investors and lenders, but this is never a wise thing to do because money is never free. Lenders will expect you to pay back the loan with interest, and investors will expect a return on their money. Therefore, you must ask for the optimal funds that are neither too much nor too little.
How much funding do you need?
As per Eric Dalius, the best way to ascertain the amount of money you need for your business is to monitor your business performance closely. The exercise starts by doing a forecast every quarter, estimating where your business is likely to be in the coming three months, six months, a year, and beyond in profit and revenue generation. Next, answer the questions about how you intend to use the money, the expected return from business, and what the liabilities you are currently carrying like debts and interest payments.
Having arrived at the number of funds you need; you must explore the funding options and choose between debt funding and equity funding.
What is debt funding?
Borrowing money is the most widely practised method of business financing, which is known as debt funding. In simple words, you approach some lender to borrow money that you pay back over an agreed time, along with interest. A bank, an alternative lender, and any friend or family could be the lender. Small businesses find the option of debt financing more practical, quicker, and easier. Small businesses are not attractive to investors who are normally interested in multi-million-dollar deals and have high expectations on the return on investment. Moreover, there is a barrier to entry to venture capital or equity funding.
Besides loan, which is the most popular means of debt funding, there are other financing options like establishing a line of credit. Only if you have a business that is likely to experience exponential growth in the first few years that you can expect to avail equity funding.
What is equity funding?
Equity funding is the process of raising business finance by selling the ownership of your company. Investors agree to put in their money in exchange for offering them shares or business equity that make them co-owners of your business and enabling them to control it. Venture capitalists, angel investors, or even someone from family or friends can come forward to invest. One of the benefits of equity funding is that the participation of the investor in the business can be valuable as they can mentor and also guide the business with their experience to make it grow faster so that they get good returns.
Consider your type of business before you decide which type of financing to go for. But if yours is a small business, it does not have any prospect of equity funding as investors would not take an interest in it.