Common Sources of Financing for Small Business

The choice of financing is an important determinant of whether a product reaches the market, or whether an existing business can survive. The choice of financing is an important part of being an entrepreneur and business owner, and the ability to raise cash when you have no or limited history takes skill and creativity. There are a number of sources of financing. The suitability of the alternatives depends on what stage you are at, and will change as the company matures from stage to stage. The following outlines the most typical forms available.

Yourself, Family and Friends

The most obvious and common start is for people to self finance. That means they either draw down on their savings or they use personal debt such as credit cards, credit lines or equity mortgages to finance their business. Family and friends are often used as a source of financing. Although they are not always in a position to properly evaluate the business venture, family and friends have long-time relationships and experience with the entrepreneur and are knowledgeable about his/her reliability and ability.

Strategic Partner

Strategic partners can not only provide a source of financing, but often they can provide an area of expertise that the entrepreneur does not bring to the table, such as operational or marketing skills. Naturally, the pitfall of a partner is that you do not maintain full control over the company and that sometimes there is a falling out between the partners. So it is important that you do your homework and choose your partner carefully.

Angel Financing

Angles tend to be freelance financers interested in loaning smaller amounts of money, say between $50,000 -$500,000. They can often provide the seed capital required to develop an idea to get to the point where a firm can obtain formal financing. Angel investors will also invest in growing companies that may have a strong revenue base, but are not yet established enough to get bank or other financing. Another benefit of Angels is that they can bring a lot of experience and industry contacts to the table.

Venture Capital

When firms approach venture capitalists, they are generally developed to the point where a venture capitalist can add value. The venture capitalists will generally sit on the board of directors, provide expertise and provide funding based on the attainment of milestones. They are generally interested in firms that can generate rapid growth ? and returns - over a few short years; your time horizon is generally 3-8 years.

Trade Credit

One of the largest sources of short-tem financing, trade credit occurs whenever you purchase from a supplier but do not need to pay for the merchandise for 30 days (or whatever the terms are). Trade credit can be expensive if you are foregoing discounts, but a new firm may not have much of a choice.

Factoring

Factoring is also a popular source of financing for growing firms. When you generate a receivable you may sell it to a factor who will then collect the receivable for you. Typically, you will get between 75%-90% upfront for the receivable and the remainder when the factor collects, less a fee.

Asset Based Lending

Asset based lenders will lend to businesses that lack sufficient cash flow to support unsecured financing, but have sufficient assets that can serve as collateral. Typically, the assets are accounts receivable and inventory, but can be equipment or other similar assets. The lender relies on the assets to repay the loan, not the cash flow of the firm. Fast growing firms who cannot get sufficient financing from a financial institution will be a typical client of an asset based lender.

Mezzanine Financing

Mezzanine financing is subordinated debt, a type of hybrid between senior debt and equity. As Mezzanine financing is typically high risk, it can be expensive. A typical target company generally has been in business for a number of years and has an established revenue base and positive cash flow stream. Often, a company may have reached its maximum level of financing from a lending institution and will obtain mezzanine financing to bridge the gap and finance their growth. The Mezzanine financer will subordinate its debt to the main lender.

Banks

By the time a firm can approach a bank they usually have been in business for a couple of years, have developed solid revenue, are earning profits and have a reasonable balance sheet. The bank will provide daily operational financing as well as long-term financing. Generally the cheapest form of financing, it can also be the hardest to get.

About The Author

Jeff Schein is a CGA and offers advisory services in the areas of business planning, business modeling, strategic planning, business analysis and financial management for new ventures and growing small businesses. Visit www.companyworkshop.com or mailto:jeff@companyworkshop.com.

---

Definition of Security: Small Business Owner

Yes, that IS security when nobody can downsize you because... Read More

How to Find A Group that Needs Speakers

How do you find groups that are in need of... Read More

Environmental Boat Washing and Detailing

Some marine biologists feel that the concentration of dead marine... Read More

Setting Up as an Electronic Repair Authorized Service Center

If you plan to upgrade your workshop into an Authorized... Read More

Survival Tips For Your Small Business

No matter type of business you operate you've got to... Read More

Creating a Power Plan

Part of the power plan is making sure you have... Read More

Personal Success - Take a Break from Business

Have Some Time to Yourself One of the most important... Read More

Boat Detailing Tips and Procedures

Auto detailers are often asked to clean boats and detail... Read More

How to Increase the Cash Flow in Your Private Practice in 30 Days

If you have a busy private practice, chances are you... Read More

Building Marketing Momentum For Your Small Business

The success of your business depends on your ability to... Read More

Tips For Successful Home Show Businesses

Opportunities for home show businesses have never been more abundant.... Read More

Top 7 Small Business Tax Tips

Here are seven ways for owners of small businesses to... Read More

How Is the LEGAL SYSTEM Dishing Out JUSTICE in Your Town?

Thankfully, most of us will never find out. That is... Read More

WARNING to Home Based and Small Business Who Want to Buy Television Cable Advertising

Most small businesses will not even try to advertise on... Read More

Creating a Paperless Office

When working from home, it is usual to find that... Read More

Women and Small Business

In the book Women and Small Business author gives all... Read More

Reaping the Rewards of Cost Cutting

In these days of insecurity and uncertain futures, the tendency... Read More

Buying a Business

Start thinking about buying an established business if you want... Read More

Most Franchises Are Small Home Businesses

Many of our nations 400,000 franchisees run their businesses out... Read More

The Advisory Board: A Business Owners Most Valuable Resource

As a company grows, the owner's role begins to change.... Read More

Sex Up Your Business Growth

A top executive called up me late in the night.... Read More

SBAs 8(a) Program Can Help Some Companies Compete

Q: A friend told me that as a woman of... Read More

Does Your Small Business Marketing Suffer From The Bulldog Effect?

If you're an entrepreneur responsible for your own small business... Read More

Arranging Your Fundraiser

When deciding to host a fundraiser for your company or... Read More

Bad Regulators Cost Small Businesses

When a regulator finds a target to go after to... Read More

Aircraft Washing Service Operations Manual

Anyone who is serious about washing aircraft as a full... Read More

SBIR - A Nice Add-on Business

If you are a small business and qualify to participate... Read More

Combating Over Regulation of Small Business

Many small businesses do quite well due to the blood,... Read More

Using Excel Payroll Sheet to Make Payroll System Easier

For the employees, payday is the brightest day; they finally... Read More

Over Disclosure Hurts Businesses

Many investors and business ethics professionals are calling for more... Read More

The Role of the Business Model and Strategy for Business

People will always stress that having a well researched business... Read More

Mobile Detailing Environmental Concern in the Deep South

Macon, GA goes after garage-gas station conversion detail/hand car washes... Read More

Starting a Business in New Hampshire

Hew Hampshire car wash market. Well we have visited every... Read More