As almost every business owner now knows, bank loans have long been the traditional source of business support, but things are different now. With a tough economy that is just now starting to get back on its feet (depending who you listen to or believe!), many businesses are turning to other resources in their search for funding (or business financing).
No matter what business you’re in—and for whatever reason you need funding—there are two major types of business financing to consider: debt and equity.
Your first option is Debt Financing, the most straightforward funding alternative. Debt financing usually requires periodic interest payments and repayment of the borrowed principal within a specified period of time. Your standard bank loan is the most obvious example of business financing.
The other funding option is Equity Financing, which involves raising capital by selling an interest in your business to investors. Instead of receiving a guaranteed return, investors are given the opportunity to share in your company’s profits. In many cases, though, they’ll also insist on sharing in the management and control of your business.
Questions to Ask Yourself About Business Financing Needs
Each of these financing options can work very effectively in different situations, but only you can decide which will work best for you. And you need to ask yourself a number of questions that will help you make the right choice.
For example, did you start your business so you could “do it your way?” Or, so that you could leave a legacy of some kind? If so, you probably won’t be comfortable giving up even a modicum of control of your company. That rules out equity financing and points you solidly in the direction of a bank loan or other form of debt financing.
On the other hand, do you simply want to make a bundle by growing your business—and then selling it and moving on? In that case, equity financing may be exactly what you’re looking for and can provide two highly marketable benefits: an infusion of needed cash, as well as specific expertise and management skills from the investors who will help run your company. Their help could ramp up your business more quickly than if you were on your own—and make your company more attractive to potential buyers.
More to come on types of business financing….
In our next post we’ll talk about the various types of debt financing – from financial institutions to factoring – so stay tuned.
Or take a quick ‘Raising Business Financing’ questionnaire now.Raising Finance questionnaire