Career Advice - A Community Blog

Erik Larson writes about the job market, resume improvement, and career advice

Different Finance Options for Small Businesses

Written by Erik Larson, Community Blogger | Sep 17, 2017 6:51 PM

Only a few businesses can survive without seeking external financing. If you own a small business, you might have a hard time figuring out which financing option to pursue. This article outlines the various small business funding options at your disposal to help you in starting, growing and managing your business. But before we can explore these options, let's look at some of the reasons your business may require financing.

• Starting up 

If you have a great idea but no money. Seeking out external funding can help get your small business off the ground.

• Late invoices 

If your business relies on customer invoices, late payments can put a dent in your cash flow. Small business financing can mitigate the cash flow gaps.

• Seasonal businesses 

Your cash flow is usually tight during low seasons. External funding will help you maintain your payroll, pay the bills and maintain equipment.

• Emergencies 

The unexpected can happen in any business. Small business financing can help cushion you from unfortunate incidents and even help you bounce back.

• Opportunities 

Sometimes the unexpected could be a good thing. When opportunity knocks, you may need to expand, buy more equipment or hire more workers. If you hadn't saved up some cash, external financing would come in handy.

There are many financing options for your small businesses out there, but to help you understand them better, we are going to group them into two broad categories:Debt financing and equity financing. Each has its own advantages and disadvantages.

Debt Financing

Debt, also referred to as credit, is a form of business financing that allows you to borrow a certain amount of cash from a lender and pay it back after a specified period, with interest. There are different types of debt financing from which you can choose.

1. Traditional bank loans

It is the most natural place to look for funding for most businesses. If you intend to take this route, you are more likely to get a short-term loan. They are smaller than their counterparts and have a faster application process. But because of their easy accessibility, they have very high interest rates. 

2. SBA loans

You shouldn't confuse Small Business Administration with a lender. They are an arm of government that encourages the lenders to lend money to your businesses by guaranteeing significant portions of the loan. They help you acquire loans for which you may not have necessarily qualified.

3. Business line of credit

A business line of credit offers you access to a predetermined amount of cash. You are free to use the money or part of it at any given time, and it is refilled to the original amount after you pay it back. You only pay interest on the money you actually use. If you choose not to use the money, nobody will charge you a dime! Business line of credit is an example of a small business revolving line of credit. The other is a business credit card.

Equity financing

Equity financing flips the whole idea of credit financing on its head. Instead of paying interest on the money you borrowed, you trade ownership of part of your business to get access to funding. This form of financing has its advantages and downsides as well. It will give you access to more capital compared to debt financing, but giving away part of your business can be a real bummer. You can get equity financing from any of these three sources.

• Angel investors 

These are wealthy individuals who want to multiply their money by investing in your small business. They are usually very experienced and will offer you great advice and mentorship.

• Venture capital 

Think angel investors and then multiply it. You get venture capital investors. They are firms dedicated to financing your business for equity.

• Family and friends

Working with familiar faces can be interesting, but such arrangements are prone to fights and disagreements. Ensure that terms and conditions are well stipulated before going for this option.

There are other alternative forms of small business funding including crowdfunding, 401K financing, competitions and grants. Ensure you understand the needs of your business first before settling on a financing option. How much money do you need? How soon do you need it? Are you ready to share equity? These are some of the fundamental issues you need to consider when choosing a funding option for your small business.

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