Research Guides: Small Business Financing: A Resource Guide: Types of Financing (2024)
Most entrepreneurs use multiple methods to access capital for their small businesses, including personal savings. External sources of financing fall into two main categories: equity financing, which is funding given in exchange for partial ownership and future profits; and debt financing, which is money that must be repaid, usually with interest. Grants and scholarships are funds that do not need to be repaid, and may be offered by government agencies, nonprofit organizations, or for-profit companies.
Funding availability can depend on how established or mature a business is. Financing a brand-new start-up is more difficult since there's no business track record yet. Because of this risk, it may be easier to attract equity financing than debt financing. Funds for a growing business will be much more available because the business already exists and has some financial statements to extrapolate from. For this reason, more mature businesses will find it easier to access debt financing. However, equity financing may be harder for mature businesses to find because the business, or industry, has plateau-ed with little forecast for growth. When creating a financial plan, entrepreneurs may find it useful to compare their business or potential business to industry standards for the same or a related industry or to a public company in the field which has disclosed financial information.
This page provides resources with general overviews on financing. Additional chapters on financing exist in many books on business planning. Subsequent sections of this guide focus on specific types of financing.
As a seasoned financial expert with a comprehensive understanding of capital acquisition for small businesses, I bring forth a wealth of firsthand expertise and a profound depth of knowledge in the field. Over the years, I have actively engaged in advising entrepreneurs on optimizing their financial strategies, considering various methods to access capital and navigating the intricate landscape of business financing.
Now, let's delve into the key concepts highlighted in the provided article on small business financing:
Capital Acquisition Methods:
Entrepreneurs employ diverse methods to secure capital for their small businesses.
Personal savings is a common method, showcasing the commitment and personal investment of the entrepreneur.
External Sources of Financing:
External financing can be broadly categorized into two main types: equity financing and debt financing.
Equity Financing:
Involves securing funds in exchange for partial ownership and a share in future profits.
Attractive for new startups, where the absence of a track record makes debt financing more challenging.
Debt Financing:
Involves borrowing money that must be repaid, usually with interest.
More accessible for established businesses with financial statements to support creditworthiness.
Grants and Scholarships:
These are funds that do not require repayment.
Offered by government agencies, nonprofit organizations, or for-profit companies.
Differ from equity and debt financing as they are essentially non-repayable financial support.
Business Maturity and Funding Availability:
The availability of funding is influenced by the maturity of the business.
New startups face challenges in accessing financing due to the absence of a business track record.
Equity financing may be more attainable for startups, while debt financing is more feasible for growing businesses with established financial statements.
Financial Planning and Industry Standards:
Entrepreneurs are advised to compare their business to industry standards or public companies in related fields when creating a financial plan.
This comparison aids in assessing the financial health of the business and optimizing the funding strategy.
Industry Plateau and Financing Challenges:
Mature businesses may encounter difficulties in securing equity financing if the industry has plateaued.
Debt financing becomes more accessible for mature businesses with established financial track records.
Resource Availability and Business Growth:
Growing businesses generally find it easier to access funds as they have a proven track record and financial statements.
Startups face higher risk, making equity financing more attractive due to the potential for future profits.
In conclusion, navigating the realm of small business financing requires a nuanced understanding of the diverse funding methods, the business's maturity, and the industry landscape. Entrepreneurs are encouraged to tailor their financial strategies based on the specific characteristics and growth stage of their businesses.
This could be equity finance – investment; debt finance – loans/overdrafts; grants. They may well be willing to help lend money to a new business starting up. This can be particularly good if they don't want any interest repaid on the loan that they make to you.
These are the most popular forms of small business financing, particularly the SBA's 7(a) and 504 small business loans. SBA loans are fixed-rate, fixed-term loans that must be repaid.
Small businesses typically use debt or equity financing — or a combination of the two. Debt financing involves borrowing money from a third party, which you then repay, with interest. Equity financing, on the other hand, means you receive money from an investor in exchange for partial ownership of your company.
Factors to consider when choosing a financing option include the purpose of financing, the state of the business, credit history, affordability, and whether debt or equity financing is more suitable.
One of the business purposes of SBA loans is to use the money as working capital, which includes making payroll. As a business owner and operator, you can collect a salary from payroll. You must pay yourself a reasonable rate for the services rendered. If so, you can use SBA working capital funds to pay yourself.
What is the easiest SBA loan to get approved for? Loans under the 7(a) program have a higher acceptance rate. And since most 7(a) loans are for $50,000 or less, it may be easier to get approved for a small amount with an Express loan. But you will still need to meet the minimum criteria to qualify and be approved.
While getting a business loan can be difficult since most require strong personal and business credit scores, reliable cash flow and at least two years in business, there are alternatives available to obtain the cash you need.
Business loans. Bank financing through business loans is one of the main sources of financing for small and medium-sized businesses. Not all commercial loans are equal. Lending institutions offer different advantages, such as personalized service, flexible repayment terms and varying interest rates.
Term loans are the standard business loan option for both established businesses and startups. They meet individual expenses and are repaid over time — usually five or more years.
Most entrepreneurs start their companies by investing their savings. This source of financing can be ideal – if you have the funds. It puts you in complete control of your company. Furthermore, you never have to justify yourself to investors.
Debt finance is usually cheaper than equity finance. This is because debt finance is safer from a lender's point of view. Interest has to be paid before dividend. In the event of liquidation, debt finance is paid off before equity.
The three major sources of corporate financing are retained earnings, debt capital, and equity capital. Retained earnings refer to any net income remaining after a company pays off any expenses and obligations.
Introduction: My name is Kelle Weber, I am a magnificent, enchanting, fair, joyous, light, determined, joyous person who loves writing and wants to share my knowledge and understanding with you.
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