Navigating Your Way in the World of Small Business Debt

Navigating the world of small business debt is not easy when you are doing it for the first time. Here are the various options and what you need to know.

Starting a business in the twenty-first century is both easier and more complicated than ever before. Easier, because you can start marketing yourself as a business online immediately, with instant access to billions of people. More complicated, because almost every market is saturated.

Small businesses looking for financing almost always experience the latter. How do you go about getting finance when there are so many other companies like yours applying for limited funds?

The good news is that even in a crowded market there are multiple funding options. If your business stands out from the pack, you will be able to attract investors. If you are one of many taking advantage of a massive target market, you can still get funds by applying for various forms of credit.

Navigating the world of small business debt is not easy when you are doing it for the first time. Here are the various options and what you need to know.

Equity Financing: Angel Investors, Venture Capital Firms

Many modern startups view equity financing by angel investors or venture capitalists (VC) as the holy grail of funding. Equity financing refers to funding provided by an individual or company to a startup under the agreement that the provider will be part-owner of the company.

There are a couple of reasons why equity financing is so coveted. Firstly, it provides a great deal of validation to a fledgling company that an investor buys into their vision enough to stake money on it. Secondly, the money is not loaned but given. The small business gets to start its journey without debt.

Venture capital is one form of equity financing. VC firms generally finance a number of companies who show potential, in the knowledge that some of these companies will inevitably fail.

Angel investors differ in that they are generally an individual or group of individuals rather than a firm. Many angel investors go further than providing funding – they take an active mentorship role, and may ask to be included in decisions regarding the future of the business.

To successfully secure equity financing, you need to be able to provide a clear rundown of why your business is likely to be successful. You need to be able to sell it in a way that makes it stand out from the crowd – both in terms of innovation and projected profit.

Applying for equity financing might seem like a no-brainer for people who are able to do so, but it is not for everyone. Some business owners do not want to share equity with investors, especially if those investors demand a place in the company’s decision-making process.

Business Credit Cards

For many fledgling businesses, the initial costs are not so well-defined. As a content provider, for example, you may need to pay for things like a website, marketing, potential employees, and office space. You don’t necessarily need a lump sum, but you do need funds available.

In these cases, a business credit card might be the best option. Rather than applying for a loan, which will start accruing interest immediately and which you will have to start paying back immediately, your business credit card will cover only what you need when you need it.

Business credit cards can be useful, but they can also be a shortcut to bad debt if you are not careful. They come with relatively high-interest rates, and although you may intend to leave most of the credit untouched, once you have it available it can be hard to ignore.

Bank Loans

The most traditional way of funding a small business is to get a loan from your bank. Banks provide loans to business owners who have good credit and can provide evidence of the viability of their business plan. You may need to put an asset down as security or collateral on your loan. These secured loans come with low-interest rates and are highly regulated.

Bank loans do, however, entail a fair amount of paperwork as well as processing time. They may also be out of reach for anyone starting from scratch with no significant assets available as security.

Online Lenders: Secured or Unsecured Loans, Fit Out Loans

There are a number of private lenders you can approach online, with quick and easy application systems. These lenders do not have as strict qualifications as the banks do. You do not need endless paperwork and can get unsecured loans more easily.

A popular type of online loan – especially for hospitality establishments and stores – is the fit-out loan. Fit-out loans refer to a sum of money you borrow in order to take care of the setting up of your establishment. This may include decor, furniture, stock, and much more. Those who are buying the property will usually get secured loans rather than fit-out loans, as they can use the property as security.

Unsecured fit-out loans is a popular option for businesses that just need an initial sum to get their space in order. Since they come with high-interest rates, it is ideal to pay them off as soon as possible. Otherwise, compound interest can begin a debt spiral that is difficult to halt.

You should take particular care with these kinds of loans during these times, as unexpected lockdowns could lead to a loss of income which makes it difficult to make payments. There are government sources of funding available at the moment which can help bail you out in this situation, but it is best to go into an unsecured loan as prepared as possible.

The world of small business funding in 2021 can seem complicated. However, while there are more companies looking for funds than ever before, there are also more sources of funding available.

Whether you go for equity financing so as to start your business on a steady footing, or loans that will give you the freedom to build your company entirely in your image, it is important to know how to navigate this world.