Small business financing refers to the conventional way by which an aspiring or already existing business entrepreneur obtains cash to initiate a new business, buy an existing business, or inject capital into an existing business to finance future or existing business operation. This form of financing is often referred to as venture capital. Venture capital is obtained in a variety of ways. In some instances, business entrepreneurs approach angel investors to obtain venture capital. In other instances, companies engage in what is called an ‘accelerator program’ which uses company assets to fund start up expenses and complete certain projects. In many instances, venture capitalists provide start up loans, later making repayment on these loans through installment agreements.
The sources to finance a business are numerous, but generally business financing comes from four sources. The most well known are banks, private equity firms, investment securities companies, and registered investment firms. Private capital includes those from a wide range of private sources such as friends and family, trade unions, businesses they have owned in the past, and/or corporations that they have invested in. Registered investment firms typically invest their own money or those of friends and family in a variety of business opportunities and investments.
Venture capital funds come from two sources: angel investors, individual venture capitalists, or corporate ownership. Angel investors usually have no relationship with a business and provide cash to invest in start up operations and/or in companies that they know are developing promising products and services. Individual venture capitalists, who generally have close ties to successful businesses, provide start up capital as a partner and have the option to acquire additional shares of ownership in a company based upon its success.
Traditional bank loans are considered a valuable source to facilitate business financing. These types of loans come in several types such as bank loans, commercial mortgage, merchant cash advance, commercial real estate loan, commercial bridge loan, and home equity loan. Typically these loans are obtained through traditional banks, though some companies are able to obtain financing without a traditional bank loan.
Another source for business financing is debt financing. Debt financing comes in the form of personal and business loans, unsecured line of credit, merchant cash advance, and commercial bridge loan. Personal business financing can be obtained from family, friends, or credit unions, while unsecured business financing can be obtained in several ways, including credit cards and personal lines of credit. However, in order to obtain a business loan, a borrower generally requires personal and business credit, a good income, and a business plan with a well-designed financial projection.
To obtain small business loans, most small business owners must have an experienced lender with a good track record and favorable terms. Typically, small business financing comes from one of two sources: either a traditional bank loan or from a debt-financing entity. Most banks offer some sort of credit facility to potential borrowers, and small business owners often shop around for the best deal. The small business financing provider then takes over the process of processing the loan application and negotiating the terms of the financing.
One alternative to securing a small business financing loan is an asset-based lending. Asset-based lending provides small business owners with the option of obtaining fast cash by offering an asset as collateral, instead of securing a traditional small business loan. Common assets include inventory, accounts receivables, business equipment, office furniture, and other capital assets. Typically, small businesses are able to obtain up to 90% of their needed funds by offering an asset as collateral.
Another alternative financing company that many business owners turn to when they need quick cash is investment capital. Investment capital comes in the form of lines of credit, preferred stock, investment securities, and other assets. Small business owners should keep in mind that this type of financing can be more expensive than most forms of personal financing because of the risks associated with such high-risk investments. In addition, it can take longer to receive approval for this type of financing, and the interest rates can be higher than many other options. However, if a small business owner is looking for a way to get the money that they need to expand or start a profitable new business venture, then this may be a viable option for them to pursue.