Finding the right financing for your company is one of the most critical steps to building and growing a business. For many companies, getting funded means developing new products, paying for daily operations or even expanding business locations. But business financing comes in many forms, each with its own pros and cons. Let’s break down the types of company financing and how each can fit into your next up business development plan.
What is Business or Company Financing?
Business or Company financing is a way to get the money you need to run or grow your business. It provides capital to cover expenses, pay employees and invest in growth. When a business needs money it can turn to different sources of financing including loans, investments and self funding.
The right financing approach can make a big difference. Choosing the right method means you don’t give away too much control or commit to heavy repayments that can hurt the company’s cash flow. Let’s break down all the risk types of financing and what each one offers.
Best for large business loans
- 3 Months in Business
- $10,000 in Monthly Rev
- Minimum Credit Score 550
4.9
Best for large business loans
- up to $1.5 million
- APR range Not disclosed
- Minimum Credit Score 570
4.7
Best for Small business loans
- Apply in Minutes
- No Hidden fees
- Wide range of Options to choose from
- Get funded in as little as 24 hours*
4.8
- Real-time pre-approvals for those who qualify
- Time in business: 6+ months
- Average repayment terms by loan product
4
Types of Financing
Equity Financing
Equity financing is when you get funded in exchange for giving up part of your business. This type of financing involves investors who believe in your new business and are willing to invest in it. In return they become shareholders, owning part of the business and sometimes have voting rights on business decisions.
Venture Capital Firms:
These venture capital firms look for businesses with high growth potential. They invest big money and may ask for a big chunk of ownership. – Venture capitalists’ capital is often used to fund big projects like product launches or expansions.
Angel Investors:
These are usually wealthy individuals who invest in early stage businesses. They may not ask for as big an ownership stake as other venture capital investors or venture capitalist and capitalists so are a preferred choice for startups.
Benefits of Equity Financing:
No debt to repay so no monthly loan payments. Perfect for businesses that need a lot of cash upfront to start up and for owners who are okay with sharing control.
Debt Financing
Debt financing involves banks lending you funds that you must repay with interest over time. This is one of the most common ways businesses get funded as you get to keep full ownership long term debt.
Secured Loans:
These loans require collateral like equipment or property. Because lenders require the lender has something to secure the loan, secured loans may have lower interest rates.
Unsecured Loans:
These loans don’t require collateral which may result in higher interest rates right loan amount. They are for businesses with good credit or a proven revenue stream.
SBA Loans:
The SBA partners with lenders to offer loans with flexible terms and lower interest rates. These are good for small businesses that meet certain criteria.
Benefits of Debt Financing:
Debt financing can be used for specific expenses like equipment or inventory. Plus interest on business loans is often tax deductible which can help with interest payments and reduce the company’s taxable income.
Other Financing Options
If traditional loans and investments don’t work for you, there are other options. These options have different eligibility requirements, and structures but offer flexibility for businesses.
Crowdfunding:
Crowdfunding raises money from many individuals (crowdfunders). This is good for products or businesses with public interest.
Invoice Financing:
This type of financing allows companies to borrow against their unpaid invoices. Good for businesses with cash flow issues due to outstanding invoices.
Asset-Based Lending:
Companies can borrow using their assets as collateral. This includes inventory, accounts receivable or even machinery.
Funding Sources
When funding, companies often go to external funding sources. These include venture capital firms, angel investors and small business lending institutions. Each has its advantages depending on the company’s stage, needs and goals.
Venture Capital Firms: They target high growth businesses especially in tech and innovation sectors.
Angel Investors: They provide investment funds for startups and early stage businesses.
Small Business Lending Institutions: These institutions offer various loans for small businesses. These various business loans may come with specific conditions based on the business’s revenue, credit score, debt capital amount or assets.
Loan Options
There are many types of small business loan and loans, each for different needs:
Term Loan: A lump sum loan with fixed repayments over several years. Good long term financing for businesses that need funds for big expenses.
Line of Credit: A line of credit gives businesses access to a set amount of funds they can draw from as needed. Good for cash flow management.
Invoice Financing: Good for businesses waiting on customer payments. Borrow against unpaid invoices and get cash sooner.
Self-Funding and Bootstrapping
For businesses that don’t want to take on debt or give away ownership without enough money, self-funding or bootstrapping might be the way to go. This involves raising capital by using personal savings, revenue from the business or both to fund the operations.
- Self-Funding: When the business owner invests their own money, they have full control of the business without taking loans or investors.
- Bootstrapping: Using the company’s revenue to grow the business. Requires careful budgeting and cost management but the owner gets to keep full control.
Managing Business Expenses and Debt
Financial management is crucial for any small business administration especially when it comes to managing expenses and debt.
Strategies for Managing Business Expenses
Keeping track of business expenses is key to being profitable. Here are some strategies to help:
Creating a Budget:
A budget is a plan for the business, how much the business will need and how it will be spent. It helps to make financial projections, prioritize expenses and avoid unnecessary costs.
Tracking Expenses:
Track all expenses and business owners can see where to cut costs or optimize spending.
Reducing Operating Expenses:
This could mean lower startup costs, negotiating with suppliers for better prices, finding more efficient processes or even reducing energy consumption.
Debt Management
If a business is funded by debt, managing that debt is key to avoid falling behind on payments and the risk of getting into financial trouble.
- Creating a Repayment Plan: A structured plan helps to prioritize payments and avoid late fees or default.
- Making Regular Payments: Stay on top of payments and avoid penalties and keep the business credit in good standing.
- Consolidating Debt: This means combining multiple loans into one, often with a lower interest rate. Debt consolidation makes it easier to manage finances and potentially save costs.
Financing is a big part of building and growing a business. From equity to debt to alternative financing options, there are many ways a business can get the capital it needs. Choosing the right type of financing depends on the business goals, stage and cash flow needs.
By using financial statements, doing due diligence, understanding the different financing options and learning to manage expenses and debt, a business can position itself to grow and succeed. Remember, smart financial decisions today means a brighter future for your business.
Best for large business loans
- 3 Months in Business
- $10,000 in Monthly Rev
- Minimum Credit Score 550
4.9
Best for large business loans
- up to $1.5 million
- APR range Not disclosed
- Minimum Credit Score 570
4.7
Best for Small business loans
- Apply in Minutes
- No Hidden fees
- Wide range of Options to choose from
- Get funded in as little as 24 hours*
4.8
- Real-time pre-approvals for those who qualify
- Time in business: 6+ months
- Average repayment terms by loan product
4
FAQs
What does it mean when a business is financing?
When a business is financing, it means the business is raising funds to support its operations, expansion or other financial needs. This can mean getting loans, attracting investors or using internal resources to generate the required working capital. Financing is important to maintain cash flow, cover business expenses and invest in growth opportunities.
What does it mean when a business offers financing?
When a business offers financing, it gives customers or clients the option to pay for products or services over time instead of upfront. This makes high-cost items more affordable to consumers by breaking the total cost into monthly payments. Businesses often partner with financial institutions or credit unions to offer in-house financing to facilitate this first monthly payment.
What is a business finance?
A business finance is the management of its financial resources, including planning, organizing and controlling of funds. This means everything from budgeting and forecasting to investing and borrowing. Good financial management means a business can meet its obligations, invest in opportunities and achieve its long term goals.
What is an example of business finance?
An example of business finance could be a small business getting a bank loan to buy new equipment. This type of debt financing allows the business to get the necessary tools to increase production without dipping into its cash reserves. The loan will be repaid over time, with monthly payments, with interest, so the business can spread the cost of the equipment over its useful life.
