Outside financing for small businesses falls into two categories:
Debt financing involves borrowing a fixed sum from a lender, which is then paid back with interest.
Equity financing is the sale of a percentage of the business to an investor, in exchange for capital.
Before you seek capital to grow your business, you need to know where to find debt vs equity financing, which of the two types you qualify for, and how to weigh the pros and cons of each. Watch the following video and read through the guide to learn what the best options are for your business.
Types of debt financing
Debt financing comes in many forms from many types of organizations, they include:
Secured lines of credit from banks or other financial institutions: Though harder to get, this type of financing has low interest rates, and lets you draw down only as much cash as you need, in any given period.
Term loans from banks or alternative lenders like Bond Street: These provide the full amount of capital upfront, and require regular payments over a fixed amount of time.
Credit cards from banks, credit unions, savings and loans, and other financial institutions: You borrow money that must be paid back with interest after a grace period.
Invoice or receivables financing from financial companies: When you need cash on hand, this form of financing fronts capital at a discount, for income you would receive later.
Merchant cash advance from MCA companies: This loan product is tailored to businesses which receive the bulk of their revenue via credit cards. The lender takes a fixed percentage of your daily credit card receipts. (MCA’s can be a bit confusing, so be sure to check out the following guide if you’re considering an MCA as an option for your business.)
Types of equity financing
Equity financing typically comes from three sources:
Friends and family (or other small investors): These private investors put a relatively small amount of money into your business in exchange for relatively small pieces of the pie.
Angel investors: Also generally private individuals or associations, these investors typically put 10s to 100s of thousands of dollars into your company and are sometimes looking for a large ownership percentage.
Venture capital firms: These firms publicly invest millions of dollars into very promising startups.