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.

shuttle to Midway Beardstown .. Lockport Chicago limo O’Hare

In The News:

The FBI has issued a warning that scammers are impersonating doctors, police and banks using spoofed numbers as "smishing" texts surge nationwide.

Communities with unreliable internet service stand to gain after Amazon's Project Kuiper launched its first full batch of satellites into orbit April 28.

Tech expert Kurt “CyberGuy" Knutsson says unsubscribing from spam might actually backfire. Learn when to avoid it and stop junk effectively.

Tech expert Kurt “CyberGuy" Knutsson talks about how the first nonstop beating heart transplant, called zero ischemic time, at Taiwan hospital changes surgery.

Kurt “CyberGuy" Knutsson: FBI warns of "time-traveling" hackers.

Kurt “CyberGuy" Knutsson talks about a soft, vine-like robot called SPROUT that aids safe survivor rescues in collapsed buildings.

Health insurance giant Blue Shield of California confirmed it had been sharing private health data of 4.7 million users with Google for three years without even realizing it.

Delta and JetZero’s blended wing body aircraft marks a meaningful step toward a cleaner, quieter and more efficient future for air travel.

Recent reports show many common passwords can be cracked in literally seconds. Kurt the CyberGuy explains how to strengthen your passwords.

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

Iron, a robot that stands 5 feet, 8 inches tall and weighs 154 pounds, combines advanced artificial intelligence with human-like movement and exceptional vision.

Hertz, the rental car giant, recently confirmed that customer information was exposed through a cyberattack on one of its software vendors.

There are a number of features with AirPods you may or may not know about to take your listening experience to the next level. Kurt the CyberGuy explains.

These 35 Chrome extensions have privacy and security concerns. Tech expert Kurt “CyberGuy" Knutsson says to delete them now.

Tech expert Kurt “CyberGuy" Knutsson says 329,000 mph fusion rocket promises to be fast, disruptive and enable deep-space missions.

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

Tech expert Kurt “CyberGuy" Knutsson says a new autonomous AI is a game changer that also raises privacy risks. Is your data safe?

Tech expert Kurt “CyberGuy" Knutsson says robots and drones are revolutionizing fruit farming with faster picking and smarter handling.

Landmark Admin revises May 2024 cyberattack scope to show twice as many people were affected. Kurt “CyberGuy" Knutsson gives tips to help stay safe from an insurance data breach.

Tech expert Kurt “CyberGuy" Knutsson talks about how Yamaha’s hydrogen outboard motor could revolutionize boating with zero emissions.

Tech expert Kurt “CyberGuy" Knutsson reveals how to memorialize or remove a deceased loved one’s Facebook account and protect their digital legacy from misuse or scams.

Tech expert Kurt “CyberGuy" Knutsson says an Apple Watch saved psychiatrist Amanda Faulkner by detecting deadly leukemia early.

Scammers and fraudsters are increasingly targeting the most vulnerable, especially nursing homes and the personal data of their residents. Kurt the CyberGuy has safety tips.

Infected USB flash drives can spread malware among multiple organizations in ways that can easily bypass traditional security systems.

With a fully automated warehouse system and AI-powered robots, Ocado's Hive picks, packs and delivers grocery store orders in just a few minutes.