Whether you’re just getting started or have been in business for many years, every business at some time or another will need a little outside financial help. Equipment breaks down, you outgrow your space, or maybe you want to invest in infrastructure. Whatever the reason, it’s nice to know you have options when it comes to financing the growth of your business.
When it comes to injecting money into your business, you typically have four options:
- Cash, either from you personally or from your business
- Gifted funds from family and friends
- Investor funds: this is cash in exchange for ownership/portion of net income
- Borrowed funds
There are pros and cons to each option, and you will need to weigh them against your current situation and your goals in order to determine which option is best for you.
We all know that cash is king, but in a young business cash may not be as readily available as it is in a mature business. Even if you do have cash on hand, you may not want to rush into spending it without first considering the following:
Pros of using cash:
- You don’t have to pay interest.
- You don’t have to give up equity in your company.
- You don’t have to mess with paperwork or tracking payments.
- It doesn’t affect your credit.
- Cash is a liquid asset so you can use it when you need it.
Cons of using cash:
- Cash typically represents your working capital and is necessary for daily operations and emergency funds. If you deplete your cash too quickly, or just before a bump in the economic road, you may find your financial hands tied.
- Cash is a scarce resource. It’s quickly depleted and takes time to replace.
We love our family and friends. They support us through thick and thin, and it’s great to know we have that network should we need it. However, you may want to think twice before you tap into that network financially.
Pros of using gifted funds:
- Peer-to-peer lending networks make it easy to tap into family and friends’ financial resources.
- They require less (and sometimes no) paperwork.
- They have a vested interest in your success.
- If you have a vast network you can accumulate enough small donations to reach a sizable injection for your business.
Cons of using gifted funds:
- Your family and friends may not be able to provide enough money to fit your needs.
- Informal arrangements have a tendency to backfire, even among family. Monetary obligations can strain some of the most important relationships in your life.
- You still may have to pay back that money and sometimes with interest.
Shows like Shark Tank have opened up the public’s eyes to the powerful and nerve-wracking experience of seeking outside investment for a budding company. Just like any option, investors are a double-edged sword and may not be right for every business.
Pros of seeking investors:
- Investors can provide a quick and often sizable injection to help push you over the hump to that next big level.
- Investors are keen on making sure their investment was worthwhile, so they will bundle their expertise in the deal, giving you a huge ace in the hole.
- Investors often take equity or royalty has repayment, which means you can gradually make payments based on the growth of the business rather than adding a large fixed payment to your expenses.
Cons of seeking investors:
- Investors tend to be focused on product-oriented businesses, so if you have a service-based company you may not be able to get investment.
- You have to give up equity in your company. Adding another chief to the mix can bog down the decision making process (in some cases) and may compromise your brand vision.
Many businesses in need of funds jump to the lender option first. It’s certainly the most common and most well known option when it comes to securing needed funds.
Pros of borrowed funds:
- You have choices when it comes to sources of borrowed funds. Traditional banks, government programs, credit unions, micro-lenders, and mezzanine funds all have initiatives to help businesses at all stages of development.
- You can choose between an open line of credit that you can tap into whenever you need a little extra money, or seek a loan for a specific project or investment.
- You get to retain complete ownership of your company.
Cons of using borrowed funds:
- You have to pay interest and make regular payments, which increases your monthly expenses.
- It’s a long process requiring lots of paperwork.
- 3. It affects your credit.
- Often you have to put up collateral. If you default, the bank can take out a lien on vital assets.
Bottom line—there is no one-size-fits-all option for securing additional funds for your business. What’s good for one company isn’t necessarily good for another. Even in your own company you may find that certain sources of funds that are good for you now won’t make sense in the future and vice versa. That’s why it’s so important that, before you jump on one option or the other, you first weigh the pros and cons and decide what’s best for your business now.