What Sources Can You Consider for Funding Small Business?

What Sources Can You Consider for Funding Small Business?

Thursday, May 30, 2024

There are various types of sources for funding small business, such as credit cards, lines of credit, bank loans, £1000 loans, bad credit on benefit loans, and loans from friends or family.

Funding small businesses is not a cinch, especially if you are a start-up. “Even if you need a small sum, it can be difficult to take out a business loan,” say experts. “Funding start-ups often require you to submit a strong business plan, which helps your lender understand the likelihood of your business success.”

If your business idea is too small, such as you want to sell bakery products prepared at home, you do not need a business plan. This is because the money requirement will not be more than £1,000. Since the purpose of borrowing is to fund your business expenses or initial capital, the processing cannot be the same as payday loans.

A lender would like to see your repaying capacity. It is suggested that you run your business along with your full-time job to ensure that you do not have to shut it down. “If it is not possible to handle both things together, you should still have a passive income source.” No lender will give the green light unless you have some sort of income to pay off the debt.

Sources to Consider Funding Small Business

“If you have thought of starting a small business, here are the funding sources that you can think of applying. Each one has its own upsides and downsides.”

  • Bad credit on benefit loans

If you need a small sum and you have already left your job, you can take out bad credit on benefit loans. These loans are particularly ideal for small businesses. It is not necessary to have a passive income source, as unemployment benefits will be used as your income.

However, remember that these loans are quite expensive. You will have to pay high interest and settle the dues on time in full. As a portion of your unemployment benefits will go towards the settlement of the debt, you might face difficulty getting by, which might result in re-borrowing. Chances are you end up being caught in an endless spiral of debt in funding small business.

  • Credit cards

Credit cards are also a good source for funding your small business. “Whether you need money for initial capital or for small expenditure, you can use your credit card.” As long as your credit card has a balance, you can use this to meet your business expenses.

“A good part of using a credit card is that you can avoid paying interest by paying off the balance within the grace period.” Some credit cards allow you to pay down in fixed instalments. This is particularly applicable when you borrow quite a large sum. Each instalment will involve a smaller amount of interest.

If you fail to pay off the full amount within the interest-free period, you will be charged an interest per day basis.

  • Line of credit

Instead of a credit card, you can also use a line of credit. Experts say, “This is similar to the credit card in terms of convenience as you do not have to apply to a lender every time you need money officially.” But this allows you to borrow money based on the available balance repeatedly.”

For instance, suppose you have a credit line worth £3,000 and you have withdrawn £1,500. Now, you can withdraw more than £1,500 anytime. If you pay off the balance up to £500, you will be free to withdraw up to £2,000. So, the borrowing limit keeps changing based on the available balance.

“If you use a line of credit, remember that you will be charged interest from the moment you withdraw funds until you pay off the balance.” The amount will be charged only on the withdrawn funds, meaning there is no clause that you cannot make partial payments.  

  • A 1,000-pound loan

If you do not have a credit card or do not want to use it for any reason, you can take out a 1,000-pound loan. These loans are an option only when you have a fixed income source. This is probable funding small business. “If you want to use this money to fund the initial capital of your business, you must have a passive income source.”

“If you have a job, your monthly pay will be checked as a measure of your repaying capacity.” If you are out of work, you should have a passive income source such as rental income, dividend income, interest income, and the like. A £1,000 loan can be actually expensive.

  • Bank loans

Bank loans can also come in handy if you want to borrow a larger debt. These loan are option on funding small business. Banks or mainstream lenders will not let you borrow a smaller sum. If you need money to fund small expenses, you will have to apply for a loan from a direct lender.

Bank loans could be affordable to private loans, but only when your credit score is good and your repaying capacity is strong. If your credit score is bad, you will be charged higher interest rates. “A rule of thumb says that you should prefer doing up your credit score before applying for a loan from a bank or a direct lender.”

  • Loans from family and friends

Your family and friends can also help you in your hour of need. Though it seems like going to them with a cap in hand, treat it like a loan. This lending is appropriate on funding small business. Based on your repaying capacity, you should come up with a repayment term and instalment amount upon which the other party has agreed. Make sure you do not fall behind on payments because if you break their trust, you will not be able to restore your relationship with them again.

The bottom line

“There are several funding sources that you can consider applying for when it comes to funding small business.” Before you take out any loan, make sure you understand their pros and cons properly.

Do research and pick the best lender that has the reputation and offers the best interest rates. “Choose the loan that best fits your needs, and do not borrow more than you need.”

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