Small business financing is a challenging task. In fact, it is difficult to raise funds when the risk is involved in the startup models. If you are running an existing business or looking forward to launch your own startup, you will surely love cash inflows in order to run your business operations smoothly.
I’m sure that you’ve already read a lot of stuff on How to finance a business with no money or What is the best business financing options for your startups. But in this article, I’m going to highlight and discuss all the available small business funding options that will help you to pick the best financing option for your startup dream.
Remember, every small business financing option have its pros and cons. So, choose the right option carefully in order to fund your business.
23 Small Business Financing Alternatives for Biz Owners
1. Mobilize your Savings
Whenever people start their own businesses, they usually finance businesses through their own pockets. In fact, it is a traditional and most common method through which you can fund your startup idea.
2. Use your Salary
There are numbers of people working in the corporate sector who are effectively running side businesses along with their jobs. If you are working for other company and getting handsome salary then fund your startup through remuneration.
3. Ask your Friends and Family for Financial Help
This is another common method through which you can finance a small business. You can ask your beloved ones to help you in your financial matters so that you can start and run a business. Remember, this type of financing option may leave bad impact on your relationships due to late repayments of loans.
4. Find Angel Investors
Angel Investors are individuals (not friends and family members) who are supposed to be skilled persons and have sound knowledge and experience of business. These types of people usually look for those startups that are in need of money and they invest for the sake of good return on their investments.
Angel investing is a good alternative to finance a small business. Remember, if you take money from angel investors and finance your business then you will have to share your business equity with them.
5. Find your Business Partner
This is another good way to fund a business. If you need more money to start a business then you’ll need to find your business partners so that they will not only invest in your business but also share their skills and experience to expand a business.
6. Financing through Small Business Loans
Financial institutions especially banks usually offer small business loans to SMEs and Corporate sector so that they can get handsome interest/markup on their loans. It is a quick way to get money but remember bank loans will decrease your final profit due to heavy interest charges.
7. Royalty Financing
Before I suggest you this financing alternative, let me tell you what is Royalty Financing?
Royalty financing is a new financing option, which is quite different from equity financing and debt financing. If you go for royalty financing, then you’ll receive advance payment from the investor/group of investors so that you can launch/manufacture your business commodities. In exchange, the people who invest in your business will receive the specific percentage of your future revenues.
The good side of this alternative is that you will not lose any equity in your business. All you will need to share your future profit with the investors.
8. Try Crowdfunding
Crowdfunding is another good financing alternative for small businesses. Nowadays, startup owners prefer to raise funds through crowdfunding because it is easy and cheap option as compare to other types of business financing options. All you need to explore the best crowdfunding sites on the internet, after that complete your registration process and start your successful crowdfunding campaign to raise money for your dream business.
Factoring means account receivable finance. It is another financing technique to recover your cash quickly. Factoring is basically a transaction in which small businesses sell its account receivables to a third party financial institution which is known as factor.
If you are running a business and facing slow cash inflows then factoring is good financing alternative to get your money back.
10. Venture Capital
Venture capital is a small business financing technique in which investors invest money in those startups that seem to have long term growth potential.
11. Use a Credit Card
Credit card financing is a quick and hassle free technique to get money for your business. To raise funds through credit cards, you’ll have to build good credit line history with banks. Apart from that, raising funds through credit card is little bit a costly method. If you do not repay your credit cards loans on time then you will have to pay heavy interest charges on credit card loans.
12. Fund your Business through Contents
Governments and private organizations encourage youth to become entrepreneurs and create more jobs in the market. If you have a killing startup idea then you should participate in content/entrepreneurial events and present your idea. Once your idea gets clicked, event participants will help you to achieve your dream.
13. Pre sale of your Commodities
If you are supposed to be an expert in manufacturing some specific commodities and also have good fame in the market, then presale your commodities to the buyers. In this technique, you’ll receive advance payment from the buyers and you’ll have to deliver the agreed commodities on some future date.
14. Offer Franchises
If you want to expand your business but small business financing is the main hurdle for you, then why not you sell your business franchises. In this way, you’ll not only increase your cash inflows but you can also expand your small business easily.
15. Financing through Retirement Money 401(K)
Raising money from 401k seems to be a good idea for those wantrepreneurs who want to start their own businesses. You can also fund your business from your Retirement money 401(k).
16. Incubation Centre
Nowadays, incubation centre are playing a key role in the entrepreneurial growth. They not only incubate new startup ideas but also help the owners to launch and expand their businesses.
Raise Money through Islamic Mode of Financing
Likewise conventional financing system, there are also other ways of financing alternatives through which you can fund your startup business. These alternatives are Islamic financing methods.
You may wonder that what is the actual difference between conventional and Islamic financing system. The basic difference is that Islamic Financing is free from interest (Riba) while the conventional financing system is entirely based on Interest system.
Modaraba is a type of financing option in which one partner invests money while the second partner manages the funds and business. The first partner who invests money is known as RAB UL MAL while the second partner who manages the funds and business is known as Mudarib.
Musharakah is another Islamic financing technique in which both partners contribute their capitals in order to start a business.
19. Diminishing Musharakah (D.M)
DM is a sub category of Musharakah. In this model, partner (A and B) contribute their capital and start a business. After certain period, partner (A) sells its business equity units to another and partner B becomes the sole owner of the business.
Islamic banks prefer to finance assets through DM financing.
20. Murabaha (Cost Plus Financing)
Murabaha is one of the most common Islamic financing methods which are used by Islamic financial institutions. It is a financial transaction in which seller discloses its purchasing cost as well as profit with the buyer.
Musawamah is a little bit similar to Murabaha. But in Musawamah, seller doesn’t disclose its purchasing/manufacturing cost with the buyer.
Salam (Bai Us Salam) is an Islamic small business financing contract in which advance payment is made while the delivery of goods is made on some specific future date.
It is worth to mention here that the Islamic Shariah doesn’t allow the seller to sell the goods, if he/she doesn’t has the possession/ownership of the goods. However, in Salam, it is allowed to receive advance payment but with the following conditions: Predetermine your goods
- Specific Quantity
- Specific Quality
- Accurate Weight
- Future specific date
Istisna is another Islamic small business financing option for those people who want to avoid Riba transactions. It is an exchange contract with the delivery of goods at some future date. As compare to Salam, future date is not fixed in the Istisna while the rest of things are specified.
In this financing technique, payments can be made in installments or lump sum till the delivery of the commodities.
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