“Growth is never by mere chance; it is the result of forces working together.” – James Cash Penney
Looking to grow your business but need a cash injection? There are all kinds of ways to fund business growth, each with their own risks and rewards.
Lack of funding is a key reason why many businesses fail to scale. Hence, we’ve decided to focus on several of the most common ways to fund business growth.
In this article, we’ll talk you through 9 of the most common ways to fund business growth. Read on to learn about:
- Different types of loans
- Sourcing investment
- Taking on New Partners
- Crowdfunding and Cloudfunding
- Making more money without loans
Let’s get started!
1. Bank Loans
Banks are a trusted and common source for small business funding. They’re particularly popular with entrepreneurs because you don’t have to give up any control over your business or sacrifice part of your future profits once the loan is repaid.
However, getting funding isn’t easy. You need a compelling business plan that convinces the bank that you will be able to pay back the loan over the specified period. You will likely have to wait a long time for your application to be processed, too, so it’s far from ideal if you’re looking to capitalize on opportunities close on the horizon.
Plus, of course, the biggest risk is that the bank could force you to liquidate your company if things don’t work out, in order to pay back the loan.
2. Personal Loans / Self-Funding
Setting up or growing a business is inherently risky, and many people prefer to take that risk themselves.
If you have assets such as a house to your name, you’ll find it a lot easier to take out personal loans, which are guaranteed against these assets. The benefit here is that you’ll likely get a decision much faster, so if you’re super confident in your venture, it’s a good way to get the money you need to grow, fast. The downside is that if things don’t go to plan, you could lose your house, car, or whatever else you used to secure the loan as well as your business.
Loans aren’t the only way to self-fund, of course. Credit card debt is sometimes easier to manage while investing savings (or selling assets and investing the money) means you essentially limited the damage in advance. Just think very carefully about whether you could really stomach the loss.
3. Informal Loans
Another option is to ask for a loan from family or friends. Typically these are informal arrangements and, depending on the circumstances, will probably be a lot more flexible than a bank loan, alleviating a lot of the stress and pressure that comes with a firm payment deadline.
That said, disagreements over money have a way of wrecking relationships with people you love. If there are any misunderstandings or mismatched expectations about when you’ll be able to pay people back, or you drag your heels on doing so, things can get nasty very quickly. Consider whether this is a risk you want to take – or whether it’s fair to ask these people to risk their money if you’re not risking your own!
4. Angel Investors
Angel investors are people with loads of experience in building and investing in successful businesses. Typically they offer much more than financial investment – they are also keen to share their knowledge and insight to fuel your success. It’s an amazing way for a growing business to access invaluable expertise and advice to get the most out of their extra cash.
That said, these angels are taking a risk on your business and they want to know it’s worthwhile. As such, they might ask for a big chunk of equity – often, up to 25%. Many entrepreneurs are simply too uncomfortable with handing over that much control!
Crowdfunding is when you ask lots of people to contribute a relatively small amount of money each, in order to fund a new company, a specific product or project, or the next stage of growth. In return, they might be first to get the new product, own shares in your business, receive ongoing perks, or even just get a thank you, according to the size of their contribution.
This approach can be enormously successful. However, there are a few things to bear in mind. First of all, you need to be extremely clear on what crowdfunders get, and you need to deliver it. You need to use a respected crowdfunding platform to manage contributions. You need to decide what happens if you don’t meet your funding target – do you return the money, or is there a plan B?
If you don’t work it all out in advance you could have a LOT of angry funders to answer to!
This is a variation on crowdfunding which is more geared towards big-hitting investors than individuals. You still upload your idea online and seek multiple contributions, but you’ll be giving up small pieces of your business in the process. There are all kinds of rules about how this works that differ according to your region; so, make sure you research thoroughly before you try it!
7. New Partners
Sometimes sharing the load with another person is a good move financially and strategically. Going into partnership with someone you trust and respect, and who is willing to invest in the business, is a big, nerve-wracking step; but, might be the best possible way forward. If you choose this path, bear in mind that the company is no longer primarily yours, it belongs to both of you. It’s a major shift!
8. Venture Capital
Venture capitalists (VCs) usually invest in the early stages of a business… and they invest big. That means, however, that they’re typically interested in seeing a return on their investment pretty quickly.
Like angel investors, VCs will want to take a large slice, even a controlling interest, in your company. Unlike angels, though, don’t expect the nurturing, advice-giving element. This is very much a financial arrangement.
9. Focusing on High Worth Clients
Borrowing or risking money isn’t the only way to raise capital quickly. An excellent alternative strategy is to pour time and energy into your highest-value clients (the ones that spent the most and pay on time) and your highest-margin products or services.
While you may not be able to sustain their increased rate of spending constantly in the long term, a well-orchestrated effort could boost your cash flow and allow you to fund business growth with none of the usual risks!
We’ve all heard the saying, “nothing ventured, nothing gained”, but that doesn’t mean throwing caution to the wind. Whatever strategy you choose to fund business growth, make sure it’s backed by realistic growth expectations and won’t give you a heart attack 12 months down the line!
Ah, if you are a startup, we’d recommend taking a look at our article on finance tips for startups.