Home
>
Small Business
>
Common Sources of Financing for Small Business

Common Sources of Financing for Small Business

The choice of financing is an important determinant of whether a product reaches the market, or whether an existing business can survive. The choice of financing is an important part of being an entrepreneur and business owner, and the ability to raise cash when you have no or limited history takes skill and creativity. There are a number of sources of financing. The suitability of the alternatives depends on what stage you are at, and will change as the company matures from stage to stage. The following outlines the most typical forms available.

Yourself, Family and Friends

The most obvious and common start is for people to self finance. That means they either draw down on their savings or they use personal debt such as credit cards, credit lines or equity mortgages to finance their business. Family and friends are often used as a source of financing. Although they are not always in a position to properly evaluate the business venture, family and friends have long-time relationships and experience with the entrepreneur and are knowledgeable about his/her reliability and ability.

Strategic Partner

Strategic partners can not only provide a source of financing, but often they can provide an area of expertise that the entrepreneur does not bring to the table, such as operational or marketing skills. Naturally, the pitfall of a partner is that you do not maintain full control over the company and that sometimes there is a falling out between the partners. So it is important that you do your homework and choose your partner carefully.

Angel Financing

Angles tend to be freelance financers interested in loaning smaller amounts of money, say between $50,000 -$500,000. They can often provide the seed capital required to develop an idea to get to the point where a firm can obtain formal financing. Angel investors will also invest in growing companies that may have a strong revenue base, but are not yet established enough to get bank or other financing. Another benefit of Angels is that they can bring a lot of experience and industry contacts to the table.

Venture Capital

When firms approach venture capitalists, they are generally developed to the point where a venture capitalist can add value. The venture capitalists will generally sit on the board of directors, provide expertise and provide funding based on the attainment of milestones. They are generally interested in firms that can generate rapid growth ? and returns - over a few short years; your time horizon is generally 3-8 years.

Trade Credit

One of the largest sources of short-tem financing, trade credit occurs whenever you purchase from a supplier but do not need to pay for the merchandise for 30 days (or whatever the terms are). Trade credit can be expensive if you are foregoing discounts, but a new firm may not have much of a choice.

Factoring

Factoring is also a popular source of financing for growing firms. When you generate a receivable you may sell it to a factor who will then collect the receivable for you. Typically, you will get between 75%-90% upfront for the receivable and the remainder when the factor collects, less a fee.

Asset Based Lending

Asset based lenders will lend to businesses that lack sufficient cash flow to support unsecured financing, but have sufficient assets that can serve as collateral. Typically, the assets are accounts receivable and inventory, but can be equipment or other similar assets. The lender relies on the assets to repay the loan, not the cash flow of the firm. Fast growing firms who cannot get sufficient financing from a financial institution will be a typical client of an asset based lender.

Mezzanine Financing

Mezzanine financing is subordinated debt, a type of hybrid between senior debt and equity. As Mezzanine financing is typically high risk, it can be expensive. A typical target company generally has been in business for a number of years and has an established revenue base and positive cash flow stream. Often, a company may have reached its maximum level of financing from a lending institution and will obtain mezzanine financing to bridge the gap and finance their growth. The Mezzanine financer will subordinate its debt to the main lender.

Banks

By the time a firm can approach a bank they usually have been in business for a couple of years, have developed solid revenue, are earning profits and have a reasonable balance sheet. The bank will provide daily operational financing as well as long-term financing. Generally the cheapest form of financing, it can also be the hardest to get.

About The Author

Jeff Schein is a CGA and offers advisory services in the areas of business planning, business modeling, strategic planning, business analysis and financial management for new ventures and growing small businesses. Visit www.companyworkshop.com or www.companyworkshop.com.

elite cleaning services Des Plaines ..

In The News:

New survey reveals 78% of parents fear AI scams targeting their kids, yet nearly half haven't discussed these threats. Learn why this dangerous gap exists.

Chrome now autofills passport and driver's license info automatically. Google's latest browser update adds official document support with encryption and user control.

Scammers impersonate Department of Veterans Affairs employees claiming veterans owe money, but real VA communications only direct to VA.gov or official channels.

The AltoVolo Sigma hybrid-electric aircraft flies 500 miles at 220 mph while operating 80% quieter than helicopters, featuring safety systems and compact design.

Google search scam alert: fake customer service numbers can give scammers remote control of your phone. Learn how to spot these traps and protect yourself.

Electric vehicles overtake gas cars in total CO2 savings after just two years of driving, with emissions benefits growing over time as power grids get cleaner.

Louvre Museum reportedly used "Louvre" as password for surveillance system during $100M jewel heist. Learn how weak passwords put even famous institutions at risk.

Bipartisan AI jobs bill from Sens. Hawley and Warner would require companies to report AI-related layoffs and hiring to Department of Labor quarterly.

Joe A. from Shelton, Connecticut, lost $228,000 to a ZAP Solutions cryptocurrency investment scam after his divorce, highlighting rising online fraud.

AI-powered autonomous trucks from Waabi and Volvo target U.S. freight driver shortage with Level 4 self-driving technology and NVIDIA computing platform integration.

Survive flight disruptions with expert travel tips: Book early morning flights, download airline apps and know your refund rights during service cuts.

Apple's iOS 26.1 update delivers major security fixes, performance boosts and enhanced privacy controls for your iPhone. Discover why updating now protects your data.

Russian hackers use fake CAPTCHA tests to spread dangerous malware targeting governments and journalists. Learn how to protect yourself from these deceptive attacks.

Stay up to date on the latest AI technology advancements and learn about the challenges and opportunities AI presents now and for the future.

Miami-Dade debuts America's first autonomous police SUV with AI cameras, drone deployment and real-time crime detection in groundbreaking law enforcement pilot.

Bank impostor scams cost Americans $2.9 billion as criminals use AI voices and caller ID spoofing to steal life savings. Learn nine essential fraud protection tips.

Foreign-owned apps secretly harvest personal data from seniors, making them prime targets for scams. Learn how to protect your privacy and stop data brokers today.

Sens. Josh Hawley and Richard Blumenthal introduce bipartisan GUARD Act to protect minors from AI chatbots through mandatory age verification and disclosure requirements.

Ghost-tapping scammers exploit wireless technology to drain accounts through small transactions, but RFID-blocking wallets and transaction alerts can protect you.

French pilot project demonstrates wireless charging roads that can deliver over 300 kilowatts of power to EVs while driving, potentially eliminating range anxiety.

YouTube's Ghost Network spreads information-stealing malware through thousands of fake videos offering cracked software, using compromised accounts and fake engagement.

Protect your privacy by disabling your smart TV microphone. Most TVs have hidden mics that listen even when voice commands are off. Learn quick steps to stop unwanted audio capture.

SessionReaper vulnerability hits Magento and Adobe Commerce stores, compromising 250+ sites in one day. Hackers steal data and hijack shopping sessions.

Master essential parental controls and digital safety tools to protect your kids online. Learn screen time limits, location settings and privacy controls every parent needs.

Cybersecurity expert shares six essential steps to protect against dark web threats, including data removal services, password managers and antivirus software.