Business Financing Definition

Learn more about what business financing is.

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Many entrepreneurs search for the business financing definition when deciding how to fund their new business. We enable small business owners to make informed financial decisions through expert advice and thoughtful products.

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What is Business Financing?

When starting a small business, you can use business financing to buy inventory, rent retail space, lease an office, or pay employees. You can benefit from business financing if you aren’t self-funding your business with capital from a previous venture or inheritance. You have two options under the definition of business financing: debt financing or equity financing.

Debt financing includes loans from a bank, government program, or other lenders. A loan requires your business to promise to pay back the loan with interest on the terms of the debt instrument. Business lines of credit or credit cards also qualify as debt financing.

On the other hand, equity financing means that you sell investors an equity interest in your company. Equity financing requires you to market the future value of your business to new investors or shareholders. In exchange for an investment, equity financiers expect to receive some control of the company or future return.

Business Financing Benefits

For the new small business owner, securing business financing might seem impossible. However, simply purchasing equipment or inventory on credit is a form of business financing called “trade credit.” The advantages of business financing include:

Small business loans are common and often accessible
You can shop around for the best terms
You can start making money quickly and have retained earnings for next year

When adding equity financing, you can negotiate the terms of the exchange, like granting voting rights or the ability to trade shares.

Business Financing Considerations

You may think business financing sounds great but still wonder what the downsides are of business financing. Business financing disadvantages include:

Owing interest, dividends, or a share in the company to others
Convincing others of the viability of your business plan
Meeting a lender’s application requirements
Budgeting and knowing how much to ask for
The time required to find lenders or investors and work out acceptable terms

Lastly, business financing is governed by a contract. Thus, while your contract is customizable, you’re bound to the agreed-upon terms. It’s best to contact a lawyer to ensure the financing works out the way you intend.

Other Names for Business Financing

The business financing definition encompasses all options for debt and equity financing. Whether you take on a loan or new investors, business financing is an easy way to get money to start your business. Therefore, some business financing examples include:

Debt financing
Equity financing
Venture capital
Startup loans or funding
Financial backing
SBA-guaranteed loans

Another option for business financing is online crowdfunding. Crowdfunding connects you with a large number of investors who’ll fund your product idea or service through small donations. Instead of receiving equity, crowdfund investors get an early release of your product, loyalty rewards, and other incentives. Depending on the crowdfunding site’s terms, you might not have to pay back crowdfund investors if things don’t work out.

Summary

Business financing is one way to fund your new business. Whether you choose to take on debt or sell equity, understanding the business financing definition might influence your financial decisions.

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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.