Eight ways to finance your small business expenses

Need to finance a small business to launch or scale? Here are eight options for you to consider.

If you want to get a business off the ground, or expand an existing business, you’ll need money. And unless you only require a modest amount, or have particularly deep pockets, you’ll usually need to get outside help for the investment.

So who can you ask? And what types of financing choice are available Here are eight options to consider when financing your small business expenses.

1) Receivable financing or rediscounting

When it comes to small business expenses, one of the areas where you can get financing is your receivables. For this, most banks have a product called receivables financing or rediscounting.

Receivable financing allows your company to advance payments on your outstanding receivables. In return, you will be charged a small fee, which is usually a percentage of the outstanding invoice.

This can enable you to offer flexible credit terms and keep relationships with your customers. At the same time, you can also enjoy good cash flow by having these receivables financed by another company. You can then use these receivables as working capital.

2) Supplier or purchase order financing programs

On the other side of receivables financing, there are also supplier financing programs. It’s a specialized form of financing that is among you, your supplier, and the bank. How it works is that the bank pays your supplier directly for the goods you purchase for your company. Then, the bank will give you a few days of credit terms to pay for the goods you’ve purchased.

This is also a very good strategy to build on your working capital because you can wait for your goods to be sold before paying for the raw materials you used to make those goods. By doing this, you won’t have to bear the risk of spending on raw materials before the product gets sold. Your cash flows will be healthy and at the same time, since these are short term loans, your debt level will also be manageable.

With this service, banks will finance your purchase orders and charge you a percentage for the services.

3) Bank loans

For small business expenses, you can take out term loans (long-term loans) or revolving credit lines (short-term loans) to finance your projects and working capital.

Term loans have a longer tenor and usually in bigger amounts, and are usually used to finance capital expenditures of the company.

On the other hand, you could consider taking out what is called a revolving credit line. You can think of a revolving credit line as a virtual credit card for your company. It’s usually short-term with a defined credit limit. You can draw from it and pay it off, then the credit limit is back to where you started.

To illustrate this, here’s an example. Let’s say you were granted a revolving credit line of $10 million. You draw $5 million on that line for working capital on January 1 to purchase inventory. Your inventory is sold by January 30, and you decide to pay the bank back $5 million. Once this is done, your credit limit goes up to $10 million again.

4) Microloan

As a small business or start-up, you might have a tough time getting approval on bank loans. If this is the case, it might be better for you to get a microloan due to your lack of credit history or collateral. Microloans often are smaller than bank loans, but require fewer documents and credit history.

Microlenders (the people who lend microloans) are often non-profit organizations, and are very different from banks. There are many different microlenders to choose from. However, with fewer documents and no credit history required, microlenders take on a greater risk by lending to you.

Because of this additional risk, microlenders charge a higher interest rate. Also, when every penny counts, it is crucial to choose the right credit card based on your business expenses. 

5) Attract and gain angel investors

If you are just starting out and have a great business idea, it might be possible for you to get an angel investor (or several) on board. They will be able to help you in a lot of things other than money. Usually, angel investors are people that have additional cash and are veterans in the industry they are funding.

An angel investor is someone (or a group of people) who will invest in a new business venture by providing capital for the expansion or start-up of the business. They are usually people who believe in your product and are looking for investments to make more money.

In a way, this is also one kind of equity financing; in exchange for money, the angel investor will ask for a shareholder stake in the company.

Angel investors are also often willing to share guidance based on their expertise, and even use their own network to open doors for you in the industry.

There are many different ways to reach out to angel investors. There are even organisations set up to help introduce you to them (a bit like dating agencies). When pitching your business, you must be clear and to the point. Usually, pitching to angel investors is what you call an elevator pitch.

6) Crowdfunding

If you don’t get lucky securing an angel investor (or it’s not the right path for you), you can also take an alternative route into crowdfunding. The internet has enabled entrepreneurs to getter funding they need to launch or grow their business by crowdfunding.

Crowdfunding is financing through a pool of people who each contribute small amounts. Through social media and crowdfunding websites, you can post your business idea. Then, people who believe in what you sell can invest small amounts until you reach your target amount.

For instance, Kickstarter is a website where artists, entrepreneurs, charities, and even individuals can post their business idea and appeal for cash. If someone likes your product and believes in your business, they can pitch in money to support your idea. There are many businesses that have launched via crowdfunding campaigns.

Often with crowdfunding campaigns, businesses offer incentives to encourage investors. These can range from small gifts, such as a certificate of thanks, through to large value packages that offer a VIP reward in return. Rewards are often connected to what you sell, such as the first run of products from your range, or unique experiences or products that can’t be purchased separately.

7) Funding from family and friends

Getting professional funding often comes with a high price tag – either through fees, high interest rates or giving up equity in your business. So it makes sense for many entrepreneurs to look to their own personal network before they approach formal lenders or angel investors.

Getting finance from family and friends can save you a lot of money – and keep you company in your ownership. However, before approaching anyone about investment, you need to make sure that you already have a plan in place. Don’t go empty handed and simply expect them to give you money for your business.

You need to have a professional presentation prepared – just as you would if approaching a bank – that describes your products, financial projections, and ideas.

Also consider what you are asking for – and what they will get in return. You could either pay them a straightforward fee in return for their investment, or give them a seat as a shareholder. In this case, at least people sitting as your shareholders will be people you know and trust, and who have your best interests at heart – not strangers. Friends and family are also likely to charge you less for any investment than a bank.

If your family or friends do decide to invest, make sure you have a clear agreement that is well-structured and written down on paper. It’s important to keep your agreement professional so everyone knows what they need to do, and what they will receive.

The last thing you want is for an amicable agreement to go sour later, and for it to damage a previously happy relationship. So make sure there are no misunderstandings from the start, and that your agreement is legally binding.

8) Sell personal assets

If all fails, and you have exhausted all other possible solutions, you might consider selling your personal assets to secure the financing you need for your business.

So what can you sell to raise the funds for your small business? You could sell stocks, real estate, paintings, and other possessions. Significant items like real estate and paintings (if you’re lucky enough to own valuable art work) could gain you a substantial amount of money for your business.

If you need the money and can get by without it, you may even decide to part with your car. We’ve even heard of women selling their wedding rings to get their business off the ground!

While it may be painful selling your personal property – especially if you have an emotional connection to it – you can always buy it back (or similar) once your business takes off.

However, for many selling their personal possessions is a last resort when financing their business. And you may only consider this once all other options have been exhausted.

Ready to finance your business?

We’re often trained to believe that all debt is bad. And while you certainly don’t want to get into debt as a rule, some forms of debt, such as mortgaging and business loans, can actually help you to make money over time.

As you can see, there are several options you can try when looking for finance for your business. And you may not just need finance when starting your business – many entrepreneurs seek loans or investment when growing their business beyond the start up stage, or to scale and expand.

Whatever type of financing you opt for, make sure you do your research carefully, do the right financial projections, and work with investors and lenders that you trust.

Photo by Clemens van Lay