Seven Tactics To Fund Your Online Business
In a world of 5.5 billion people, your business ideas could become a reality. In just a few months you can start selling products in the United States, Germany, or most other countries.
But while online businesses have a bigger reach, they also face issues that offline businesses face.
Finance is one of the most difficult challenges a business can face.
Whether you’re just drawing your business plan or have 20,000 customers, you can have funding problems at any stage of your business.
There are many solutions to this common problem. How do you find the right funding solution for your business?
This guide will explain 8 funding options to fund your online business, depending on your stage of growth. Each option will have its pros and cons.
Without further ado let’s get 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 allows anyone with an internet connection to invest in your company. You just need to sell your idea for an innovative product that will make a difference.
With crowdfunding, you can get a feel of what people online think about your business. You can also get insights about your product’s marketing and raise money.
What do crowdfunding investors get from your campaign? This will depend on the type of crowdfunding you choose. There are three types of crowdfunding:
- 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. This is a relatively new concept that attracts more traditional investors.
With crowdfunding, you can harness the power of the internet for funding your business.
Peak Design is an example of a brand that uses crowdfunding to create its products.
Some of the most popular crowdfunding platforms are Indiegogo and Crowdfunder.
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 your life is, people still believe in you. They can invest in your online business to show their belief.
What’s your great business idea? It’s important that you tell your family and friends about the new venture you are considering. And if you need cash, your friends and family can support your business to grow.
However, you should treat your family and friends funds the same way as a traditional investor. You should also be clear about the investment structure of your friends and family.
Is this a gift? Is it a loan or a gift? What is the payback structure if it’s a loan?
Money can cause damage to personal relationships. You need to be open and accountable for this fund. You can build a stronger relationship with your family and friends if your business grows.
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, you are the first person who needs to invest in your company. The idea is only possible if you are the first to invest. You must put your money where your business plan needs it.
You can start saving as soon as you start to refine your business idea. In another case, you can take from your 401K account. This is an option that you can explore, even though it may not be possible in all cases.
Bootstrapping can help you think about your business idea. It’s not easy to put all your savings on the line. Bootstrapping can help you develop the mindset that is necessary to run a successful company.
MailChimp is a well-known example of bootstrapping. 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 if demand rises above your inventory?
There are many reasons for spikes in your product’s demand. Sometimes it is due to seasonal fluctuations. Gift items, for example, can be in high demand during Christmas and New Year celebrations.
Another reason for a spike in demand could be your marketing campaigns. If a celebrity posts about your product on social media, it can encourage their followers to buy your product in hundreds of thousands.
This is what you want as an entrepreneur. It can be bittersweet if you don’t have inventory. You can get inventory financing to remove the bitterness.
Inventory financing can take two forms: a loan or a line of credit.
An inventory loan is a loan to purchase inventory or make inventory. The amount borrowed will be subject to interest.
An inventory line of credit allows you to make a loan that is available to your company. This option allows you to only pay interest on the amount that you use.
To obtain inventory financing, your lender requires your inventory as collateral. This funding option allows you to meet the needs of your customers even if your inventory is not sufficient.
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
You need to find the right lender if you want to get a loan for your online company. This is even more important if the government is involved.
The small business administration (SBA) guarantees loans for small businesses in the United States. This involvement makes the funding process win-win for both sides. Lenders can find the right business and vice versa.
To apply for an SBA loan, visit the SBA loans webpage to find the loan that best suits your needs. You can then use the lender match tool to find a lender in your area.
Once you have found a local lender, it is possible to apply for a loan. If you are approved, the lender will give you the loan and help with its management. Generally, you can borrow from $500 to $5 million through SBA loans.
Export loans are another benefit of the SBA. Export loans may be necessary for your business, as it is now common for online businesses that serve customers in multiple countries. This loan is made easier by the SBA.
However you can increase your chances of getting SBA loan, you will need to have your financial records.
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 in our daily lives, businesses have expenses every day. How can you cover these expenses if there isn’t enough cash?
This is where a business credit can be used to provide an emergency fund for your business that can meet immediate needs. A business line is an amount your lender makes available to your business.
This fund can be used to pay for overhead, inventory, and other costs associated with your business. A business line of credit allows you to only pay interest on the amount that you spend.
Also, there are two types of business lines of credit: secured line of credit and unsecured line of credit.
Secured credit requires collateral. This type of lending is less risky for the lender and has lower interest rates.
An unsecured line of credit, on the other hand, does not require collateral. These requirements are very strict. You must have strong financial records, good business credit ratings, and a track record of revenue generation. You’ll also pay a higher interest rate for 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, both public and private entities set aside certain amounts to assist businesses in different places. Businesses that win grants are given gifts.
Grants are used to support a variety of causes. It could be for minorities like blacks, or for innovations such as green initiatives.
It could also be for specific areas. Most grants require that you apply before you can receive them. This information can be found online, however.
You can also find grants online. You need to describe the innovative ideas that your business is using in order to get the best chance of getting grant funding.
Grants are free money. This means that you will face stiff competition to apply 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
To qualify for venture capital, your business must have reached certain milestones. Your chances of getting venture capital for a new business are slim if your father is a venture capitalist. Even if your daddy is a venture capitalist, your business idea should be highly profitable.
Venture capital can provide funding ranging from hundreds of thousands to multi-millions of dollars. Venture capitalists (VCs), however, will have equity in your company as a result. They will have the right to make critical business decisions.
If you want venture capital, you need to find a fund that is active in your industry. This is because most VCs only invest in certain industries.
Furthermore you should find someone who will introduce you to venture capitalists. This will allow you to land more easily than cold calling.
Valuing your business is another important aspect of getting this fund. You don’t want your hard work to be undervalued. Find an expert evaluator who can analyze your business and give it 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.
Private equity funds will typically acquire a majority of your business’s shares. Their primary goal is to make your business profitable and to sell it to a larger company or take it public.
Best for: mid to large businesses that want to move to the next stage. Private equity is for struggling companies with great 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
Having a great idea is not enough to get funds for your online company. There are thousands of failed businesses that have beautiful ideas. – Stefan F. Dieffenbacher, founder of Digital Leadership
When investors invest in your online company, they also invest in you and your ability execute these ideas. Here are four things to remember:
Prepare your business plan
A business plan is a summary of your business. It shows that you are knowledgeable about the business.
These are some important information you should include in your business plan.
- 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, potential investors will be able to understand your business and identify profit opportunities.
Connect with successful online entrepreneurs
You can have a great idea, but your business will fail if you don’t have the right people. You need to network with other successful entrepreneurs in order to grow your online business.
Many people get venture capital funds from friends who introduced them to venture capitalists. You should treasure all your connections.
Ensure you have a good personal/business credit rating
People need to know about your past with money before they can trust you with their money. If you have a poor personal credit rating, you’ll struggle to get small business loans at the beginning of your business.
If you have poor credit after running your online business for a while, you may not be able to get loans during crucial times. You should start taking care of your finances before you launch your business.
Market your business effectively
Businesses often underplay the importance of marketing their business ideas. Many people mistakenly believe that great ideas will sell. In reality, this is not the case.
You need to create a professional website and pitch to investors. You must also be able to present your idea to investors as an entrepreneur.
Obtaining funds to fund your online business can be difficult. Investors want to avoid investing in businesses that are doomed to fail.
The hardest part of your funding process is convincing investors your business has a high likelihood of success and profitability. Next, you can find the right funding option for your business.