What Is the Best Way to Finance an Online Business?
Online businesses come with unique benefits and challenges when compared to their brick-and-mortar counterparts. Typically, an online business can be started with much lower overhead than a company that requires a physical location. However, it is imperative that online companies invest in an attractive, credible web presence, as well as marketing initiatives, to help make their venture a success.
While the best way to finance an online business is dependent upon the type of company, the founder’s financial situation, and the leadership team’s comfort level with risk, there are a few types of financing that lend themselves nicely to online undertakings.
A traditional bank loan is a safe option for many companies, including those operating online. Bank loans are not one-size-fits-all – There are many types depending on your individual needs. For example, small business loans can help smaller companies amp up their operations with new equipment or materials. Start-up loans can provide quick cash for new companies wanting to make their big idea a reality. Different types of loans have different types of terms and interest rates. With a bit of research, your company may be able to find a loan that meets its requirements.
Since crowdfunding platforms like Kickstarter, Indiegogo, and GoFundMe live online, it makes sense for an online company to pursue financing on one of these sites. For a relatively low fee (usually a percentage of the total money raised), entrepreneurs can launch a campaign to fund their project. A crowdfunding campaign is a great marketing tool for new companies, as it provides low-cost exposure to potential customers and supporters. Crowdfunding isn’t a great option for long-term financing, but it can help you land the initial cash you need to get an endeavor off the ground. However, one downside is that if you do not meet your fundraising goal, supporters will not be charged, and you will not receive any money from the campaign.
Personal Savings and Assets
Since most online businesses have low overhead costs and start-up expenses, many entrepreneurs choose to finance them with their own personal savings and assets. This can include tapping into a savings account, cashing in on your 401K or other retirement accounts early, or taking a second mortgage on your home. Some entrepreneurs simply don’t have the luxury of this option. Even for those who do, it can be extremely risky to leverage your personal finances for your business. If the venture fails, you will lose everything and hurt your personal credit in the process. By keeping corporate and personal finances separate, you limit your personal liability should something go wrong.
Microloans are loans for an amount of money that is so small, it is not worth the trouble for most commercial banks. For loans between about $500 and $35,000, a microlender might be the way to go. Microlenders typically require less documentation than traditional banks, so a lack of credit history or collateral may not be as detrimental. Though microlenders employ a more flexible underwriting criteria, they do charge a slightly higher interest rate than most banks.
No matter your current financial situation or plans for growth, there is a financing option out there to help your online business succeed.