Six Different Sources of Financing Available to a Business

Starting and running a business is difficult, and one of the biggest obstacles is financing. Every business requires money to run its operations, and lack of adequate funding is often credited as one of the main reasons businesses fail. 

To prevent your business from facing the same problem, it’s essential to know the different financing options. With such a wide range available, you’re bound to find something that suits your business’s needs. 

So, if you’re looking to secure financing for your business, here are the different options you can choose from. 

 

Equipment Financing

Equipment financing refers to using a lease or a loan to borrow or purchase equipment for your business. Equipment, in this case, could refer to cooking equipment for a restaurant or a delivery van. It differs from other forms of finance because it involves physical assets that serve as collateral. Due to this, equipment financing typically involves lower risk and is more cost-effective than different financing types. 

Equipment financing is an excellent source of finance for businesses that want to grow but can’t afford to invest in expensive equipment. Since the payment is spread out over a period, it’s an affordable option for a business. Additionally, if your industry is rapidly changing due to technology and machinery gets obsolete quickly, it makes more sense to lease equipment than to buy it. 

 

Business Credit Cards

One source of short-term business finance is the business credit card. This source of finance is, in fact, the most common source for small businesses as they can easily use to pay for all kinds of business expenses without incurring interest, as long as the outstanding balance is paid in full by the credit-free period. In fact, 31% of businesses that seek credit apply for credit cards, making them a popular option. 

For startups, especially, a business credit card is handy since it improves their purchasing power. However, it’s important to note that while the credit is free in the short run, a credit card could be quite detrimental and result in huge amounts of debt and significant interest if you fail to keep track of your spending. On the other hand, if you use your business credit card wisely, you can create a positive credit rating, which is valuable for when you want to secure a loan.

 

Business Loans

Business loans can provide you with money that you have to pay back over a particular period with added interest. These could vary from medium to long-term, and there is a wide range of options available, varying from government-backed to commercial loans. 

Unlike venture capital, with business loans, you don’t need to give any equity and you can opt for an affordable plan and payment rate. Many countries also offer tax benefits in exchange for paying a loan in full. When you’re opting for a loan, it’s vital to be mindful of the timeline and payment terms and determine whether you can pay it. You should ideally have a plan in place to pay it back before you finalize the agreement. 

 

Grants

Grants for small businesses are usually awarded by a government body, the government, or a charitable organization. Grants are typically provided for companies that meet certain criteria and fulfill an application process. 

While they are an excellent source of funding for businesses since you don’t need to pay them back, the application process is quite competitive and is often dedicated to businesses that are part of specific sectors. When deciding whether to apply for a grant, you need to determine how much time the application process will take and how likely it is for your business to be awarded. 

 

Crowdfunding

Crowdfunding has become a popular source of finance for a wide range of businesses, with campaigns having an average success rate of 22.4%. It typically involves getting a small amount of finance from a large number of people, all contributing to a large sum. Depending on the type, crowdfunding can be loan-based where you crowdfund a loan, rewards-based where you offer perks or rewards in exchange for the finance, or equity-based, where you offer equity in exchange for the funds. 

Crowdfunding is often suited to businesses that are product based and high-tech. It’s crucial to note that crowdfunding is heavily dependent on whether you can market your business idea. If you’re able to do that, though, it’s an excellent financing source that provides you with the funds required for the development and launch phases. You can explore crowdfunding platforms such as Kickstarter, Crowdcube, and Seedrs. 

 

Venture Capital

For companies looking to grow, venture capital is a brilliant option to choose for equity exchange. In 2018, $254 billion was invested in 18,000 startups worldwide. To obtain VC, you need to demonstrate that your business is scalable and has evidence to prove it. When a VC is interested, you also need to be prepared for an audit and should be able to provide updated plans and books. Lastly, VCs are seriously invested in your growth, which may bring pressure with it, so you need to be ready for that. 

 

Final Thoughts

Any business owner needs to know the pros and cons of the various financing options available to them. It’s important for you to research and determine the best way forward for your business to ensure you’re securing the best financing option for your business’s long-term growth.

Have you ever secured financing for your business? Which option worked out for you? Let us know in the comments below.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.