3 types of small business financing

Library | 8/1/2019

Business FinancingDo you feel overwhelmed — maybe even a bit intimidated — at the thought of seeking small business funding? That’s understandable. While there's quite a range of lending options available, it’s not always easy to get a small business loan. However, if you can determine which type of business financing you’d qualify for and how to use it, you’ll have a much better chance at getting it.

Before looking at your options, your first step should be to solidify the reasons why you need funding. For example, small business financing can improve your bottom line by helping you:

  • Pay for startup expenses 

  • Purchase equipment 

  • Lease or buy commercial property 

  • Build new construction or make renovations 

  • Manage debt 

  • Cover cash flow gaps caused by late payments 

  • Ease cash flow during the off season 

  • Build equity 

  • Provide a quick fix in the event of an emergency

Once you know what you want to use the money for, it’s time to consider your options and determine which is best for you. Here are the top three types of small business financing:

1.   Debt financing. Although borrowing money to make money may seem counterintuitive, it’s a common and effective way to build a business. However, your success at acquiring this type of financing will depend on your personal credit history and the amount of business experience you have. 

2.   Equity financing. If you’re looking for additional support beyond receiving capital, this may be the perfect option for you — but, you need to be willing to give up some of your decision-making power. In exchange for equity (part ownership) of your business, you can seek an angel investor — typically a successful businessperson willing to provide both funding and advice. Venture capital firms function somewhat similarly to angel investors, but they don’t typically work with small businesses unless they’re tech startups. Another option is to approach a friend or family member to become a source of equity funding.

3.   Less traditional financing options. If you’re willing to get creative and try something new, there are plenty of other ways to get access to more capital. For example, many small business owners have successfully raised money through crowdfunding. You might even qualify for a small business grant or be eligible to participate in a competition for funding. You could also dip into your retirement savings through a 401(k) or traditional IRA, however, you should be aware of the tax implications for doing so.

No matter which path you choose, it’s important to remember that your credit history and the number of years you’ve been in business can largely affect whether you qualify for certain types of small business financing. Therefore, it pays — literally — to manage your money well and shop around for the best deal.

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