About 29% of all businesses fail because they run of out capital. While this is a huge figure, the figure for startups is even worse as according to a report by Forbes, 90% of all startups fail within the first five years of operation, and poor cash flow is a major reason for this.
Funds are important to run a business as they help in buying machinery, expanding staff and pay the bills. Without the right kind of money, business processes come to a halt, sales begin to decline and a whole lot of problems may begin to arise as well.
Funds are necessary when it comes to running a business smoothly or when a business needs to be expanded. Here’s where a business needs to look for ways to find funds.
Here are 4 ways to get funds for your small business:
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Business Loans
One of the easiest of ways to get funds for your business is to get a business loan. However a business must qualify first to be able to get this loan.
The first requirement to qualify for a business loan is to have a good credit score. Credit score helps determine how manageable a business is when it comes to dealing with finances. Several factors are considered when calculating the credit score. These include timeliness and past credit record.
Credit score normally ranges between 300 to 850, the higher your credit score, the easily you’ll get a business loan.
The lender may ask you for collateral just to be on the safe side. Collateral is basically a guarantee and should be of more value than the amount of the loan.
According to Lend, “a business loan ranging from $1000 to $50,000 can be borrowed by a lender or a bank depending on your cash flow and ability to pay back. Moreover, an interest rate between 6% to 13% may be set depending upon the time given and the amount taken.
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Home Equity
Business owners who own homes can get a bank loan depending upon the value of the home. This requires the owner to have more than 15% of home equity. This can be calculated by (value of home – mortgage value) / value of home. The amount given in this type of loan is somewhere between 70% to 85% based on the total value of your home.
Two kinds of loans fall in this category, namely, HEL and HELOC. HEL is like applying for a second mortgage while HELOC works more like how credit cards do by using home as a collateral.
This loan should only be applied for if you are positive about returning the loan on time because it is your house that’s at stake here. Moreover, the interest rate involved in this type of loan is 4.89% for a 10 years period of time.
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Credit Cards
There are around 37% of businesses who use credit cards to deal with their business expenses because it’s like having a wallet in your pocket. However, this way of funding needs to be used cautiously because it comes with huge interest rates (18% on average) which can turn out to be a problem to pay back in time.
The use of credit card can very negatively affect your credit score so be sure to be careful of their use.
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Crowdfunding
This is another easy way to get funds for your business. It involves reaching out to a large amount of people and seeking their help to finance your business. The people who fund the project get a stake in it or some other benefit.
The Verdict
If you are out of money and exhausted all available options (friends, family or savings account) and do not need the funds immediately then try the lowest risk capital raising option first, crowdfunding.
If funds are needed within the next month then reach out to a small business loan comparison site. They will be able to help you find the most affordable business finance solution.