Starting a business is hard, but managing it is even harder. You may have the best product or service in the world, but you can’t succeed without capital.
Financing is the lifeblood of any new business. Funds will pay for things like investing in inventory, hiring new employees, or purchasing more advertising. Financing your company not only provides you with funds for growth, but it also works as a line of defense against unforeseen events. And as you get established, it helps cover your operating costs until you are able to make a profit.
Depending on what stage you are at in your company’s development, there are different financing options. In this series, we will explore some of the most common types of financing that businesses use.
Common Types of Financing a Business
Financing a business is one of the most important decisions a business owner makes. That is why it is essential to get a 360-degree overview of each before taking the plunge.
There are many different types of business financing, but they can be grouped into larger clusters, to make things less overwhelming at first.
Here they are:
- Debt Financing
Any type of financial service that involves borrowing money from a lender and repaying it to the lender after a set period of time. Basically, it is always a loan with an interest rate. This can be bank loans, credit cards, or lines of credit from your own bank account, etc.
- Equity Financing
This implies selling a share in your company to an investor in exchange for cash. Investors purchase the stock, the business gets the funds. In return, they get an ownership stake, meaning they become your partner. Investors share any profits the business makes or have input on how it is run.
Funds that are given to businesses who meet specific criteria in order to complete a particular goal or project. There is no obligation to pay back any money received, but you need to meet strict application rules. There are many organizations that offer grants specifically to small business owners.
Entrepreneurs can receive contributions from people from all over the world on crowdfunding platforms. It is an alternative tool for accessing capital by sharing your business idea with strangers in exchange for donations or pre-orders. Requires a strong promotion campaign for success.
- Presales (revenue generating)
This method allows you to make more money upfront by selling products that have not been manufactured yet. Customers pay before an item is generally available for purchase. This way, businesses can set up a budget and get an idea about whether and how much financing they need from other sources.
In this series, we explore some of the most common types of financing that businesses use. Take a look at the next chapter to find out more.