Sources of Small Business Financing

Because businesses have different needs than consumers, there is a much wider range of financing options available for business owners. The type of funding appropriate for your business and the availability of it depends on a number of factors, including the amount needed, the intended use of the money, the length of time you need the money for, the financial standing and credit history of the business, and often your personal credit score.

Perhaps the most important thing to know about business financing is that you need to plan for it in advance. If you wait until you've nearly run out of cash to try to get a loan, you may not be successful.

Here is a summary of the major types of financing and what each type is typically used for.

Business Owner's Personal Savings
Most business owners launch their businesses using their own money. But startup time isn't the only time business owners dip into their own money to finance their businesses. Many business owners use their own savings or equity in their homes to help their businesses get through slow times or to provide some or all of the money for expansion and growth.

Friends and Family
Business owners have traditionally turned to friends and family when they need more money than they can provide or raise on their own resources. Friends and family financing may be structured as either as a loan, or as an investment, depending on the needs of the parties involved

Credit Cards
Businesses typically use credit card for startup needs, day-to-day office supplies, small equipment purchases, online purchases, and online advertising.

Bank Loans and Lines of Credit
Banks are the go-to source for many business finance needs. Although specific types of financing options may vary from bank to bank, a large commercial bank is likely to offer business lines of credit, term loans, SBA loans, commercial real estate loans, and other specialized services.

Trade Credit
Trade credit is short-term credit that is provided to you by companies from whom your business buys things such as inventory, raw materials, and supplies.

Equipment Leasing
If your business needs equipment, leasing is worth looking into. Open-ended leases let you buy the item at the end of the lease term for an additional payment; closed leases are like renting – you use the equipment for the term of the lease then give it back or get a new lease on newer equipment.

Receivables Financing
Receivables financing is borrowing against your company's receivables. The company pledges the receivables as collateral for a short-term loan. This provides cash to operate with until you get paid from your customers.

Factoring
In factoring, a third party (called a factor) buys the receivables from you at a discount and collects their money from the customer.

Angel Capital and Venture Capital Investors
These are outside investors who provide money to start or grow a business in return for partial ownership of the business. They usually plan on make money on their investment when the business is sold or goes public.

Sources of Financing