by Janet Attard
Last Updated Monday, March 22, 2021
There many ways to finance a business. The right one for you depends on your business needs, credit and situation. Here are the business financing sources to look into.
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How can you finance your business?
The best finance source for your business depends on a number of factors, including the amount needed, the intended use of the money, the length of time you need the money for, the financial standing and credit history of the business, and often your personal credit score.
Perhaps the most important thing to know about business financing is that you need to plan for it in advance. If you wait until you’ve nearly run out of cash to try to get a loan, you may not be successful.
Here is a summary of 11 types of financing and what each type is typically used for.
- Business Owner’s Personal Savings
Most business owners launch their businesses using their own money. But startup time isn’t the only time business owners dip into their own money to finance their businesses. Many business owners use their own savings or equity in their homes to help their businesses get through slow times or to provide some or all of the money for expansion and growth.
- Friends and Family
Business owners have traditionally turned to friends and family when they need more money than they can provide or raise on their own resources. Friends and family financing may be structured as either as a loan or as an investment, depending on the needs of the parties involved
- Credit Cards
Businesses typically use a credit card for startup needs, day-to-day office supplies, small equipment purchases, online purchases, and online advertising.
- Online Lenders
Online lenders like OnDeck and Kabbage provide a source for short term loans and lines of credit that may be easier for some small businesses to qualify for than funding through commercial banks.
- Bank Loans and Lines of Credit
Banks are the go-to source for many business finance needs. Although specific types of financing options may vary from bank to bank, a large commercial bank is likely to offer business lines of credit, term loans, SBA loans, commercial real estate loans, and other specialized services.
- Crowd Funding
Crowd funding is a way for small businesses to raise money from members of the general public (ie, the “crowd”) who are willing to back your company and/or a product or service you are introducing. Depending on which type of crowd funding you choose, the backers receive a reward (often a new product you’re going to introduce), repayment (with some interest) of the money they provide, or some equity in your company. There is also donor-based crowdfunding, but that is usually for raising money for personal reasons or for good causes.
- Trade Credit
Trade credit is short-term credit that is provided to you by companies from whom your business buys things such as inventory, raw materials, and supplies.
- Equipment Leasing
If your business needs equipment, leasing is worth looking into. Open-ended leases let you buy the item at the end of the lease term for an additional payment; closed leases are like renting – you use the equipment for the term of the lease then give it back or get a new lease on newer equipment.
- Receivables Financing
Receivables financing is borrowing against your company’s receivables. The company pledges the receivables as collateral for a short-term loan. This provides cash to operate with until you get paid from your customers.
In factoring, a third party (called a factor) buys the receivables from you at a discount and collects their money from the customer.
- Angel Capital and Venture Capital Investors
Angel and venture capital investors are outside investors who provide money to start or grow a business in return for partial ownership of the business. They usually plan on making money on their investment when the business is sold or goes public.
Look here for more ideas on how to find the money to start a business.
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About the author:
Janet Attard is the founder of the award-winning Business Know-How small business web site and information resource. Janet is also the author of The Home Office And Small Business Answer Book and of Business Know-How: An Operational Guide For Home-Based and Micro-Sized Businesses with Limited Budgets. Follow Janet on Twitter and on LinkedIn