While financing means more cash for an organization, not all forms of financing are suitable for your business. For example, small business loans will only work for small businesses since they are modest.
There is a significant difference between banking for small business and a big one. Keep reading to learn the differences between the financing solutions and how to obtain the right financing for your small or large business.
What is business financing?
This refers to how a business acquires funding to start, expand, or purchase a company or the cash to carry out everyday business activities (working capital loan).
Financing is crucial to most businesses as it allows them to achieve set goals even when it’s out of their current financial reach.
Different sources for funding a business
1. Bootstrapping, family, and friends
It refers to financing that comes from your savings or close relations. A great option if you don’t want high-interest rates or give equity to investors. Relatives can even provide cash as a gift, and friends will give long-term loans without interest.
2. Business grants
If you need a source of financing that you don’t have to pay back, then business grants are a good option. The grants provider will, however, give directions on how you are to spend the funding.
Involves pitching your business idea to a platform of investors, and they can chip in if they love it. For example, an Indian immigrant named Hiral raised more than $11 million across to Indiegogo and Kickstarter.
4. Bank loans
Lending institutions can give you secure or unsecured loans, and they could take the form of small business loans or term loans. You need a good credit score and history.
5. Invoice factoring/discounting
If you’ve sold goods on credit, you can ‘sell’ the invoice to an invoice factoring company for instant cash. Similarly, invoice discounting is the use of an invoice as collateral for a loan.
6. Asset financing/leasing
This option revolves around the financier buying an asset for your business, then placing you under obligation to make monthly payments. The investment will be in their name during this period, and they can repossess it if you fail to make the payments. At the end of the arrangement, you will keep the asset if you decide to purchase.
7. Angel financing and venture capitalists
Just like grants, you don’t have to pay back, although venture capitalists will insist on a share of equity in exchange for their investments. These are great options because the investors usually offer expertise and business connections to help you.
8. Trade Credit Finance
Trade credit finance offers a business an interest-free short-term loan, usually needing to be paid back in 30, 60, or 90 days often with discounts granted if paid in a shorter time. Look out for terms like 2/10 net 30 (meaning a 2% discount if paid in 10 days; if not, full payment must be paid in 30 days). With a short-term loan like this, we recommend securing trade credit insurance, as this protects the supplier and the business seeking the finance against significant financial losses.
Which is the best financing solution for your business
a. For small and medium businesses
- Small business loans: this only works best for small businesses since the amounts involved are small and the qualification requirements aren’t strict, perfect for startups.
- Invoice factoring: Factors only consider the credit score and history of the buyer, not the seller, so you can apply even if you have a terrible credit score. Usually carry hefty interest rates.
- Bootstrapping or family and friends is a good option, but the funding could be modest. Therefore, it’s excellent for small and medium businesses.
- SBA loans: the Small Business Administration loan often gets awarded to upcoming firms. It will require you to make a small down payment and provide a cash flow statement; it’s aimed more at medium-sized companies that have operated for a while. You can still qualify even if you are an immigrant.
- Business credit cards and short-term loans: lenders will have less stringent requirements, but they carry larger interest rate payments.
- Crowdfunding: works great especially for startups, because it’s a low-risk option. Businesses centered around tech, tools, and general creativity tend to do well in crowdfunding campaigns.
b. Financing for large companies
These financing options are most suitable for established or large companies:
- Long-term and secured bank loans: generally carry strict qualification requirements that most small businesses and startups don’t have. Also, these firms have amassed large assets that they can use as collateral to secure huge loans.
- Venture capitalists: will generally lookout for businesses with a proven track record and a high probability of success. They generally shy away from startups.
- Business grants are more suitable for established businesses. Grant givers want to associate themselves with proven organizations. Government grants tend to assist organizations that benefit communities.
Not all financing is right for your business. For example, although small business loans are generally easier to qualify for, they often carry hefty interest rates and are short-term solutions.
Established organizations have assets and good credit scores, enabling them to secure longer-term financing at reasonable rates. These include bank loans and business grants.
Visit the link in the introduction section for tips on acquiring financing for your small business.