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.

Cadillac Escalade rentals Round Lake ..

In The News:

Kurt "CyberGuy" Knutsson compares the AirPods 4 and the AirPods Pro 2. "For me, audio quality is the most essential factor in buying new headphones or earbuds," Kurt says.

A flying shopping cart could revolutionize the way we shop and transport things. The Palletrone is a hovering platform that users push around at chest height.

Kurt "CyberGuy" Knutsson explores how you can help troubleshoot a computer issue remotely on Windows or a Mac. There are a variety of options.

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

Checking your blood pressure has become simple with the Apple Watch, and doing this can help you identify trends and manage medications.

There are a handful of ways you can make your tech experience less annoying, including through fixing autocorrect, turning off certain notifications and by creating folders on your iPhone.

A robot that stands more than 5 feet tall and weighs 66 pounds is well-equipped for household tasks, like carrying up to 44 pounds during its run time of two to four hours.

Criminals are increasingly turning to data brokers to provide access to private information that can be used to improve their scamming schemes.

The new Reader Mode in iOS 18’s Magnifier app is here to help iPhone users read something small or in poor lighting. All you have to do is snap a picture.

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

CISA warns of scammers impersonating its officials. Tech expert Kurt “CyberGuy" Knutsson urges people to be alert and verify contacts.

Tech expert Kurt “CyberGuy" Knutsson reveals how iOS 18’s satellite messaging helps isolated residents seek help in the aftermath of Hurricane Helene.

Tech expert Kurt “CyberGuy" Knutsson reveals how to protect yourself with eight steps if your iPhone is lost or stolen.

Surgeons performed endoscopy on a pig 5,780 miles away using a video game controller. Tech expert Kurt “CyberGuy" Knutsson has the details on this groundbreaking experiment.

Using public computers poses security risks, tech expert Kurt “CyberGuy" Knutsson says, so take precautions or use your own secure device.

Tech expert Kurt “CyberGuy" Knutsson discusses San Francisco deploying three advanced mobile surveillance cameras to deter crime in high-risk areas.

Lionsgate's revolutionary move to partner with tech company Runway to integrate AI into its production process is going to take the film industry by storm.

There have been cases when widely downloaded apps from the Play Store are infected with malware. Kurt the CyberGuy tackles the issue of a new Trojan malware.

A whopping 30 million people will have taken cruises in 2024, and some ships being built to keep up with this demand cost as much as $2 billion.

While you may feel pretty sharp at spotting online fraud, there's a sneaky new scam involving QR codes and parking meters across the country affecting even the most cautious people.

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

Loch Electronics' latest innovation, the Capsule Solo, is a compact kitchen countertop dishwasher that can clean up to 35 dishes in just 15 minutes.

As your teenagers navigate social media, here are some ways you can protect them including through adjusting settings, enforcing limits and communicating honestly about the dangers that exist online.

The Ukrainian Ministry of Defense shared a video of a robotic war dog being used in the field with a soldier, who was able to take advantage of the device's thermal imaging.

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