The Types Of Financing For Small Business

Small Business Finance

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Starting a small business could be difficult but rewarding. As a new venture, it could experience ‘birth pains.’ The owners of small businesses are often challenged by the scarcity of resources, especially in the financial aspect. If business financing was easier, most of us would surely have established and maintained our own sets of small businesses. But because capitalising and funding such ventures is difficult, only those with guts and resourcefulness go on.

Not surprisingly, there are many small business finance options that are available in the market to cater to small businesses, including those available from here. Common small business finance products could be categorized into three areas. Here is a brief rundown of those categories. Which funding would you consider and choose for your own small business?

Debt financing

Most small businesses prefer debt financing as a source of funding. The amount is sourced out from various lenders, non-traditional loan providers, or financial institutions. This is obviously the most viable option. Lenders could easily approve and provide loans if all the requirements are met. The loan is usually approved after the loan provider has looked at the business’ cash flow, asset liquidity, and collateral.

Most of the time, a lender also requires submission of a business plan. The financial statement is another usual requirement. The loan provider has to make sure the financial condition is healthy to avoid possible risks. What is most liked about debt financing is that small businesses do not have to ask for favors from anyone. The control of the business is also left to the owner.

Equity financing

For small businesses that experience difficulty in obtaining debt financing, equity financing is an equally viable option. It helps that there are numerous institutional and private investors that are out in the market. Such investors would readily provide money as a form of investment. That means they would ask for an equity or part of ownership in the small business.

Equity financing could come from a business owner’s family or friends. There are also private investors with high net worth who are known more popularly as angel investors. Venture capitalists are also abounding in the market and are looking for many opportunities to invest in small businesses. The setback is that full control and ownership is not left to the hands of the business owner alone.

Special grants

The government could be offering special grants to small businesses within its area of jurisdiction. This could be part of the commitment to help strengthen the overall local economy. In many cases, small businesses in specific industries (like technology) are given special grants if they apply for one.

Grants are generally aimed at helping fuel innovative and productive fires of small businesses. However, such small business finance opportunities are often overlooked. Yes, at times, it may be hard to look for and obtain such grants but all the efforts could be worth it. Another setback is that governments may impose stricter standards and requirements when issuing and awarding grants.