Business financing is providing funds for business activities, making purchases, or investing. To create a money market, financing a business also benefits because some people have extra cash, while others need money. The aim is to make investments and earn returns.
Finances are a never-ending adventure for small business owners and entrepreneurs. By approving MYR 66.8 billion in new business credit for SMEs in 2020, financial institutions, such as banks, demonstrated their sustained leadership in supporting SMEs. Making up 97.2% of all business establishments, producing 38.2% of GDP, and employing 7.3 million people, these small businesses support the Malaysian economy.
Any economic system that uses financing is essential because it enables businesses to buy goods outside their immediate price range. Financing a business is required when there are short-term problems with cash flow, substantial purchases that will stimulate growth, and emergencies. So, which type of financing is best for you?
Main financing
There are two main types of financing you can consider for your business, which are equity financing and debt financing. Read more to learn about their differences!
Equity Financing
The first financing option is equity financing, where a company sells part of the business to investors. It’s another word for ownership in a company. However, this might include some decision-making authority. In other words, selling equity also entails selling some control. Particularly in trying times, equity investors desire a role in how the business is run and frequently have voting rights based on the number of shares they own.
As a result, in exchange for ownership, a shareholder offers money to the business for a claim on future profits. The shareholders bear all the risks so they won’t receive the raised money back should the business fail.
Debt Financing
Just like car loans or mortgages, there’s an option for financing a business by borrowing money. You must repay debt financing within a strict timeline, and lenders want to be paid a rate of interest in exchange for using their money. Some lenders will also demand collateral for the asset you obtain by taking out a loan.
The bright side is that the company has complete control over its operations since you’re not giving up the ownership.
Optional financing
Besides equity financing and debt financing, you can also use optional financing options to develop your business; business line credit and crowdfunding. How do they differ from one another?
Business Line Credit
A business line of credit works like a credit card, giving you access to borrow funds with a specific limit. You can withdraw money as needed and only pay the interest on that amount, not the entire limited amount.
For example, a bank gives you a credit line with an MYR 50,000 limit. You take out MYR 10,000 for financing a business, so only the interest on the MYR 10,000 will be due. The rest is free to use with no additional interest.
Crowdfunding
Used mainly by startup enterprises and expanding businesses, crowdfunding is a method of raising money to finance businesses or projects. This method allows fundraisers to gather money from many people via online platforms.
With more micro, small, and medium-sized businesses (MSMEs) in Malaysia resorting to online platforms and more investors adopting the trend to earn greater rates, financing a business through crowdfunding is rising here.
The total amount raised by crowdfunding increased by 74%, and there was a 33.3% increase in the number of successful campaigns and participating issuers. The Securities Commission Malaysia (SC Malaysia) and Bank Negara Malaysia are the regulatory agencies overseeing this financing.
If your business needs financial support to keep moving forward, start exploring your financing options. What you’re willing to give up as a business in exchange for the financing and what your company offers will determine which financing option is ideal for you. After all, 38% of SMEs fail because they run out of cash or fail to raise new capital.
Nevertheless, financing a business is more complex than it sounds. Only after all other possibilities have been explored should the choice to pursue money be made. So explore your options, be careful, and grow the business of your dreams.