Several Ways to Fund Your Business

How to Choose the Best Type of Business Financing

      Finding the right type of financing for a business can be a difficult task. Cash flow and benefits are not the same. Lots of profitable businesses require funds to help with working capital and drive growth plans.

Most entrepreneurs use various ways to get working capital, for their small businesses, including personal savings.

External sources of financing for a business fall into 2 primary categories: 

Equity financing, i.e. funds provided, in exchange for partial ownership of the company and future profits; and debt financing, which is cash that must be repaid, usually with interest.

Grants, and scholarships, are non-refundable cash and are usually offered by government agencies, non-profit organizations, or non-profit corporations.

What is Financing Business Definition?

Financing a business definition is the process of providing cash/funds for business activities, making purchases, or investing. Financial institutions, such as banks, are in the business of offering capital to businesses, consumers, and investors to assist them to obtain their goals. Utilization of financing is very important in any economic system because it allows companies to buy products from their immediate reach. (investopedia.com) 

The Type of Finance You Choose Matters

When you’re desperately keen to buy, begin or develop a business, you might also feel like any finance will do. Don’t fall into that mousetrap. Choosing the wrong type of finance can damage your business later, or seriously hamper it.

Different types of financing have their advantages and disadvantages. Use this information to study them. Ask which one suits your business, and you as a person – because that matters too.

Types of Equity Finance

Equity financing includes a variety of smaller funding solutions. With equity finance, you must provide shares in your company in the trade for funding. There are no payments or interest, but you will need to share some of the management and profits with your investors.

Crowdfunding

Crowdfunding has become the most popular way for startups, and innovative companies to seek funding. You don't need to have a strong credit rating or collateral to get financing, but you do need to create a brilliant promotional campaign to attract potential investors.

Getting crowdfunding may be a lengthy process, and there’s no guarantee you will increase the money you need.

Angel Investors

Angel investors are investors with significant amounts of cash, who provide financing for startup companies. They are a rich person or groups of people seeking a return on their investment and are very savvy in the business they invest in.

Some angel investor groups are actively looking for early-stage companies to invest in, and they provide technical and operational information for startups. These angel investors can provide a second round of funding for developing companies after initial funding.

Financing a Business Venture Capital

Venture Capital Investment: Private equity investments are usually obtained from institutional investment groups. These funding groups vary in measurement from $50M to $5B. These investors generally invest in technology business companies that have had some initial sales and are estimated to have the capacity to grow rapidly.

They generally make investments between $1M and $50M and can actively participate in management. In general, these institutional investors concentrate their investments on certain industries they trust to have the greatest potential for growth. These investors choose to stop their funding in approximately 7 years.

Types of Debt Finance

Debt financing is the most common type of funding and includes both traditional and alternative sources of funding. You don't have to provide equity in exchange for funding, but you usually need to pay back the amount you borrowed plus interest costs.

Bank Loans

A bank loan can provide a very large lump sum to cover a large purchase or fund the expansion of a business with a strong credit rating. The principal loan plus interest is paid over a certain period of normal payments.

Loans are a very rigid type of funding, and many businesses are unwilling to do so. The application process can take several months, with strict loan criteria, meaning you must submit your detailed commercial enterprise plan, provide collateral, and have a strong financial track record.

Asset Finance

Asset Financing is a type of financing that helps businesses to finance the purchase of high-value assets, which include new and used machinery, equipment, and vehicles.

It can also be used to help businesses release capital tied to high-value assets, that they already own.

This form of financing typically includes the purchase of leases, finance leases, and operating leases. Unlike a traditional loan, the asset the business needs to purchase acts as collateral for funding, so there is no need for property security. The business makes regular payments over a specified period to repay principal and interest.

This is a long-term funding solution. You’ll need to have a compelling pitch and be willing to dedicate plenty of time and effort to promote your business.

Business Credit Cards

A business credit card can help your working capital and cover your daily business expenses. More accessible than business loans, but credit card interest rates and fees can be a luxury, and increase quickly if you don't clear your balance each month.

Credit cards are usually used to cover small purchases. If you need more funds to pay your suppliers, cover overhead costs, or expand funds, there is a more affordable and more suitable alternative.

Lines of Credit

Lines of Credit are usually used for financing working capital needs and are used on a needed basis. They are expected to rotate normally, i.e. you borrow cash for one month, then pay it back with interest the next.

They are usually provided by banks and financial companies and have an upper limit on the money that can be used on a fixed term of 1 year, a variable annual interest rate, and variable monthly payments depending on the amount of money used.

They are usually secured by things like accounts receivable and inventory. In general, this kind of debt financing is generally given to companies that are break-even, or profitable, and have been in business for more than 3 years. Current interest rates range from about 7% to 12% per year.

Invoice Finance

Invoice Finance is a flexible funding solution that allows your business to convert outstanding sales invoices, into available funding sources. Instead of waiting 30+ days for your customer to pay, you can use invoice financing, to get up to 95% of the invoice value, as a down payment. When the buyer pays the invoice, you receive the amount after deducting the fee.

Unlike bank loans, you don't need to use your home as collateral. There are 2 main types of invoice financing: factoring and discounting.

This type of funding is available to businesses that sell to other businesses, and raise sales invoices for their goods and services.