There many ways to finance a business. The right one for you depends on your business needs, credit, and situation. Here are some business financing sources to look into.
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’s 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 with their own resources. Friends and family financing may be structured either as a loan or an investment, depending on the needs of the parties involved
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 may offer business lines of credit, term loans, SBA loans, commercial real estate loans, and other specialized services.
Crowdfunding is a way for small businesses to raise money from members of the general public (that is, the “crowd”) who are willing to back your company and/or a product or service you’re introducing. Depending on which type of crowdfunding 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’s also donor-based crowdfunding, but that’s usually for raising money for personal reasons or for good causes.
Trade credit is short-term credit that is provided to you by companies from which your business buys things such as inventory, raw materials, and supplies.
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 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. An invoicing app like ZenBusiness Money can help you get paid faster.
In factoring, a third party (called a factor) buys the receivables from you at a discount and collects their money from the customer.
Angel 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.
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.