Sources of Small Business Financing

by Frances Burns I love my work

Small business financing is the means by which a business enterprise obtains finances to begin a new business, purchasing a business or bring the money to finance the future and current business operations. There are different ways a business can finance its operations with each mechanism having its own limitations and benefits. Traditionally, the options available for acquiring finances for any business include borrowing funds through debt financing and selling the ownership interests for any business venture in the exchange of capital.

Debt Financing

It is advantageous for the business to borrow finances since the lender will not have any say in the management of the business nor will he get entitlement to any profits the business would generate. Therefore, the disadvantages would be that the payments may be burdensome for the ventures that are new. The other dangers would include that any failures to make the repayments would lead to the forfeiture of the business assets including the personal assets of the business pledged under the agreement as security for the borrowed loan.

Similarly, the credit approval process might come with other bottlenecks and make the business owner not qualify for the loan or even worse still be required to pledge personal assets as security for the loan. The time for the loan processing may also be significant factor in the process. It is also dangerous in taking higher loans since this may overwhelm the business and risk the business owner declared bankrupt.

The sources for such financing may be banks, credit unions, families and friends. There are also small business administration loans, micro lenders, technology lenders, personal credit cards and equity loans. The considerations upon which these lenders give loans maybe vary and could range from one day to even more than five years for some lenders. Therefore, the speed for accessing the loans will depend on the internal processing capacities of the businesses lenders.

The private lenders have remained swift in terms of turnaround times can in many different cases settle the funding on the same day the businesses apply for the funds. When looking for finances, micro lenders can come in handy when you need to bring in a marketing agency switzerland to help you in advertising. The traditional banks can take a little bit longer because of the bureaucracy that comes with mining information from the businesses.

Equity Financing

Some businesses have opted to sell their ownership interests in financing the existing or new ventures. The businesses use the equity investment in running the business rather than continue the route of doing the loan payments that remain burdensome for the business. Additionally, the business together with its owners will not be obligated to repay the money given by the investor in the unfortunate event that the business loses in terms of profits and productivity or even fails.

However, equity financing is also marked by disadvantages. These include the selling of an ownership interest means that the entrepreneur will definitely dilute their control over the business operations. Also, the investors are also entitled to get a share of the profits from the business productivity.

It is also incumbent upon the business venture to inform the investors about the significant business enterprises and the entrepreneur also must act and do their operations at the behest and interest of the investors. This source of funding is also disadvantageous because in certain peculiar circumstances, equity financing may need the compliance from the state and federal security laws. The equity financing sources may include family, friends, angel investors and even venture capitalists.

Although the above mentioned sources are the major sources for financing, there are also other sources that would support such business ventures. These include the rollover retirement funds and other new sources of debt and equity financing.