In a space with 5.5 billion people, all your business ideas can become a reality. Within a few months, you can start selling products to customers in the United States, Germany, and most countries around the world.
But while online businesses have a bigger reach, they also face issues that offline businesses face.
Now, one of the biggest challenges your business can have is funding.
Whether you’re just drawing your business plan or have 20,000 customers, you can have funding problems at any stage of your business.
Rest assured, such a prevalent problem comes with many solutions. But how do you identify the right funding solution that fits your business’s current needs?
In this guide, I’ll explain 8 funding options for your online business depending on the stage of your growth. You’ll also learn the pros and cons of each option.
Without further ado, let’s go into the details.
50 years ago, it was almost impossible to run a crowdfunding campaign. But recently, Statista estimated that North American crowdfunding platforms raised $74 billion in 2020.
Crowdfunding is a type of funding that allows people with an internet connection from any location to invest in your business. All you have to do is sell your idea of an innovative product that can make a positive change.
With crowdfunding, you can get a feel of what people online think about your business. So, apart from the money you raise from campaigns, you also obtain insights about your product and its marketing.
What do crowdfunding investors gain from your campaign? This depends on your crowdfunding type. There are three common types including:
- Donation-based crowdfunding: in this crowdfunding type, investors believe so much in your idea that they’re willing to part with their money for nothing in return.
- Rewards-based crowdfunding: in this campaign type, investors expect to receive your product as a reward.
- Equity-based crowdfunding: in this crowdfunding campaign, investors expect to receive equity in your business. Again, this is relatively new and attracts more traditional investors.
With crowdfunding, you can exploit the power of the internet to fund your business.
To illustrate, Peak Design is a popular brand that exploits crowdfunding to create its products.
Some popular crowdfunding platforms include Indiegogo, Kickstarter, Crowdfunder, and more.
Best for: a growing online business trying to take their innovative product into the mainstream.
- There’s no need for collateral.
- Your business’s credit rating has no impact on funding.
- It helps you to raise money fast compared to other options.
- There are more failed crowdfunding campaigns than successful ones, so there’s a low probability of success.
- There’s a risk of getting nothing from your campaign if you fail to reach your target.
2. Friends and family
No matter how bad you are, some people believe in you. For your online business, they can show that belief through their investment.
What’s your awesome business idea? First, it’s important to tell people close to you about this new endeavor you want to embark on. And if you need cash, your friends and family can support your business to grow.
However, you need to treat your friends and family funds just like a traditional investor. Furthermore, you need to be clear about their investment structure.
Is it a gift? Is it a loan? If it’s a loan, what’s the payback structure?
Since money can destroy personal relationships, you need to be transparent and accountable with this fund. If you grow your business successfully, you can even foster a stronger relationship with your friends and family.
Best for: a new business, often without a minimum viable product.
- You need no collateral.
- There’s little or no paperwork involved.
- You’ll retain the decision-making of your business.
- The funds may be insufficient to meet your needs.
In most cases, the first person that needs to invest in your business is yourself. After all, the idea starts with you. You need to put your money where your business plan is.
Therefore, you can start saving once you start refining your business idea. In another case, you can take from your 401K account. While this is not always possible, it’s an option you can explore.
Bootstrapping will likely help you reflect on your business idea. Let’s face it, putting all your life savings on the line is a challenging task. Therefore, bootstrapping can evoke the mentality you need to run a successful business.
A famous example of bootstrapping is MailChimp. The marketing company was founded in 2001 by Ben Chestnut and Dan Kurzius and was 100% owned by its founders. However, Intuit purchased the company at a valuation of $12 billion in 2021.
Best for: a new business trying to create a minimum viable product.
- You have 100% ownership of your business.
- Putting your money on the line can be extra motivation.
- Your savings will usually be insufficient to achieve your targets.
- Depending on your money alone can delay business growth.
4. Inventory financing
If you’re funding an ecommerce business, inventory can be one of your significant challenges. What happens when demand spikes beyond your inventory?
There are many causes of spikes in demand for your product. Sometimes, it can be due to a period of the year. For instance, gift items can have high demands during Christmas and new year celebrations.
In another case, a spike in demand can be due to your marketing campaigns. For example, if a celebrity features your product on a social media post, this can drive their fans to purchase your product in hundreds or thousands.
As an entrepreneur, this is a situation you want. But if you have no inventory, it can become bittersweet. To eliminate the bitterness, you can seek inventory financing.
Inventory financing can be in two forms: inventory loan and inventory line of credit.
An inventory loan is a sum to purchase or produce inventory. You’ll pay interest on the sum of money.
On the other hand, an inventory line of credit makes an amount available to your business. With this option, you only have to pay interest on the amount you use.
To obtain inventory financing, your lender will require your current inventory as your collateral. This funding option ensures you can meet your customers’ demands when your inventory is insufficient.
Best for: ecommerce businesses with inconsistent demand.
- It helps you prepare for peak seasons.
- Inventory financing is more accessible than other loans.
- Using your current inventory as collateral reduces the significance of your business credit rating.
- The lender may request that you pay for an onsite visit to inspect inventory.
- You may have to pay a higher interest rate for an inventory loan.
5. Small business administration (SBA) loans
Even if you’re getting a loan for your online business, you need to get it from the right lender. This gets even better if the government is involved in this process.
The small business administration (SBA) guarantees loans for small businesses in the United States. This involvement makes the funding process a win-win for both parties. Lenders can find the right businesses and vice versa.
To obtain the SBA loan, you need to visit the SBA loans page to find a loan that suits your needs. Then, you can use the lender match to find a suitable lender in your area.
Once you find a local lender, you can apply for your loan. If you qualify, the lender will provide the loan and help you manage it. Generally, you can borrow from $500 to $5 million through SBA loans.
Another benefit you can gain from SBA is export loans. Since it’s now common for online businesses to serve customers across various countries, you may need export loans for your operations. Again, SBA makes this loan easier to obtain.
However, you need to get your financial records to increase your chances of getting SBA loans.
Best for: small businesses that find it challenging to obtain funding from financial lenders.
- Lenders have more relaxed requirements since the SBA has guaranteed the loans.
- SBA loans can have longer repayment periods than traditional loans.
- It requires a lot of paperwork.
- The loan approval process may be slow.
6. Business line of credit
Just like our everyday lives, businesses also have expenses daily. So how do you meet up with these expenses when there’s no cash?
This is when a business line of credit can be the emergency fund to meet urgent needs in your business. A business line of credit is an amount that your lender makes available for your business.
You can use this fund to meet needs such as inventory, invoices, overhead, and many other costs during your operations. With a business line of credit, you only pay interest on the amount you spend.
Also, there are two types of business lines of credit: secured line of credit and unsecured line of credit.
The secured line of credit requires that you present collateral. This type of lending puts a little risk on the lender and therefore comes with lower interest rates.
On the other hand, an unsecured line of credit requires no collateral. Therefore, the requirements are strict. You need to have robust financial records, a good business credit rating, and a track record of generating revenue. On top of that, you’ll pay a higher interest rate than the secured option.
Best for: small businesses with cash flow problems.
- Helps to improve cash flow during a period of low sales.
- You only pay interest on what you use.
- It can help improve your business credit rating when you pay back promptly.
- It’s difficult to obtain.
- You can only borrow a small amount compared to a traditional loan.
From time to time, public and private entities set aside specific amounts to help businesses in various places. Grants are gifts to businesses that win them.
In most cases, grants support various causes. For example, it could be for minorities such as blacks or innovations such as green initiatives.
Furthermore, it could be for specific locations. So, most grants have strict requirements before you apply. Luckily, this information is easily obtainable online.
Beyond that, you can find many grant opportunities online. To give yourself the best chance, you need to specify the innovative ideas your business is executing.
Since grants are essentially free money, expect a tough competition when applying for them.
Today, one of the most popular small business grants is the FedEx small business grant.
Best for: small and medium businesses.
- Your business credit score is irrelevant to your grant application.
- There’s no repayment or interest.
- Since there are many applicants, the competition is tough.
- The application process is tough.
- You may have to explain how you’ll use the grant.
8. Venture capital/private equity
By the time you qualify to obtain venture capital, you must have achieved some milestones in your business. Unless your daddy is a venture capitalist, your chances of securing venture capital as a new business are low. And even in that case, your business idea must be highly profitable.
With venture capital, you can obtain funding from hundreds of thousands to millions of dollars. However, venture capitalists (VCs) will own equity in your business as a result of this funding. Therefore, they’ll have a say in critical business decisions.
If you want to obtain venture capital, you have to find a fund that invests in your industry. That’s because most VCs invest in specific industries.
Furthermore, you should find someone who can introduce you to a venture capitalist. This will give you a softer landing compared to cold calling.
Another vital aspect of getting this fund is to value your business. After all, you don’t want to undervalue your years of hard work. So, find an expert evaluator to analyze and give your business a realistic value.
Zynga, a social gaming company, secured funding from Union Square Ventures and other venture capital funds. By 2011, Zynga was valued at over $7 billion during its IPO.
In the case of private equity funds, investors will usually obtain a majority shareholding of your business. Their main aim is to drive your business to profitability and sell to a bigger company or take it public.
Best for: mid to large businesses that want to move to the next stage. In the case of private equity, struggling companies with huge potential.
- It provides huge funds for your business operations.
- A venture capitalist wants your business to grow so that they can make profits.
- A VC firm will be involved in critical decisions of your business.
- The application process is lengthy and costly.
Tips to prepare your online business for funding
Obtaining funds for your online business goes beyond just having a beautiful idea. After all, there are thousands of failed businesses with beautiful ideas – Says Stefan F. Dieffenbacher, Founder of Digital Leadership
When investors invest in your online business, they’re also investing in you and your ability to execute these ideas. Here are four tips to keep in mind:
Prepare your business plan
A business plan provides a summary of what your business is all about. It also proves that you understand aspects of your business. Some vital information to include in your business plan are:
- Executive summary
- Market analysis
- SWOT (strengths, weaknesses, opportunities, and threats) analysis
- Current and prospective customer base
- Unique Selling Proposition
- Key personnel and their level of experience
With these pieces of information, a potential investor will understand your business and spot the profit opportunities.
Connect with successful online entrepreneurs
You can have an excellent idea, but without the right people, your business will fail. In your online business, you need to connect with other successful entrepreneurs and take advantage of your connections.
Many times, people obtain venture capital funds because they had a friend who introduced them to a venture capitalist. Therefore, you need to think of all your connections and treasure them.
Ensure you have a good personal/business credit rating
Before people can trust you with money, they have to know your history with money. If you have a poor personal credit rating, you’ll struggle to get small business loans at the beginning of your business.
And if you have a poor business credit rating after a few years of running your online business, you’ll struggle to obtain loans at important periods. Therefore, you need to start taking care of your finances long before launching your business.
Market your business effectively
Often, businesses underplay the role of marketing their business ideas. Many people erroneously think that great ideas will sell themselves. But in reality, that never happens.
You have to create a professional website, pitch, and other documents to present to potential investors. Then, as an entrepreneur who believes in an idea, you need to be able to sell it to investors.
Obtaining funds for your online business is no easy task. Because investors want to avoid putting their money in a business doomed to fail.
The heavy lifting in your funding process is convincing investors that your business has a high chance of success and profitability. Then, you can explore the suitable funding option for your current business needs.