Business financing is the activity of funding for a business whether it is just starting or is expanding. Business owners face costs every single day and sometimes some funding is needed to help the business grow. Business financing can help companies of all sizes push through any financial difficulties and expand their operations.
Types of Business Financing
There are two main types of business financing, debt financing and equity financing. Most companies use both of these funding types to get cash for their business.
Debt financing comes from a bank or lending institution and is similar to a mortgage or car loan. You obtain the funds from the lender and then you repay it. It typically accrues interest until the funds that are borrowed are repaid in full.
There are a few advantages to using debt financing including:
- The lender does not have ownership on how to run your company.
- Once you pay back the loan, the relationship with the lender ends.
- The interest you pay is tax deductible.
- The monthly payment can be included in forecasting models.
There are also a few disadvantages to debt financing as well:
- Adding a debt payment to your monthly expenses means you will have the capital to meet all business expenses, even debt payment.
- Small business lending can be slow when the economy is not doing well.
Equity financing is where you receive capital in exchange for selling part of the ownership of your company through the sale of shares. Equity financing does not have to be repaid unlike debt financing.
There are a few advantages to using equity financing including:
- You do not have to pay back the money. Since your investors are not creditors, their money gets lost along with your company in the case that your business goes bankrupt.
- You do not have to make monthly payments.
- Investors know that it takes time to build a business so you will get the money you need without
There are also a few disadvantages to equity financing as well:
- You must give up ownership of part of your company. The larger and riskier the investment is, the more of a stake the investor will want. You need to be comfortable with giving up 50% or more of your business.
- Since the company is not entirely yours anymore, you will have to consult with investors before any decisions are made.
Ways to Use Business Financing for Your Small Business
Business financing is flexible, and you are in control of how you use the funding. Some ways you can use business financing is to hire more employees, expand or open a new location, purchase technology or supplies needed for production, working capital so you have cash on hand in the case your business is in need of it and much more.
Here is list of the types of business financing available for businesses:
- Short-term loans
- SBA loans
- Lines of credit
- Business credit cards
- Equipment financing
- Invoice financing
- Merchant cash advances
- Angel investors
- Venture capital
- Family and friends
It is crucial that you do your research on financing your business before considering which type of financing is best for your business.
How to Prepare
Regardless of which type of business financing you decide to apply for, you must be prepared in advance to avoid any delays in the approval process.
Take the time to prepare a business plan that outlines your long-term business goals and your strategy on how you will achieve these goals. Some lenders may not ask you for a business plan but if you show up with one, it can help increase your chances of approval. Be sure you are able to articulate in dept of what your business plan entails.
You will also need to gather your financial statements including the balance sheet, income statement, cash flow statement, tax returns and bank statement for you and your business.
Additionally, your credit score can make or break your application so be sure to pull your credit score ahead of time and fix any errors if any on your report. The better your credit score is, the lower the rate you can receive.
The Bottom Line
You will need to decide how much financing you need, and which financing option will be the best for your business. Knowing how much money you need is important too and you will need to be specific for the reason behind seeking funds. Figure out how much you need and how long of a repayment period you need before you apply.