Businesses need to inject finance from time to time to keep the show running and ensure growth. Seeking finance infusions routinely is common even for some mid-size and large businesses to meet their obligations in the short term. Among all the financing options available, small businesses must find the right funding option because borrowing money from a wrong source can be disastrous for any small business.
Some companies have paid the price for choosing the wrong financing option by being locked in repayment terms that hampered the growth or even lost a part of the company to the lender, observes Eric Dalius, who has extensive experience as a successful entrepreneur and marketing expert. In this article, we will discuss some basic financing methods for small businesses.
Debt financing
Getting a home loan or car loan against a mortgage is the best example of debt financing, says Eric J Dalius. For businesses, the same principle of offering the entire business or some of its assets as collateral and securing a loan from some lender like any bank or financial institution follows the same debt financing principle. For startups and businesses in the early stages of development, the bank would consider the business owner’s credit when appraising the loan application. For big businesses, lenders generally undertake due diligence and analyze the credit history to understand the borrower’s reliability. One of the most significant advantages of debt financing is that the lender does not have any say or control in the manner you run your company. Your relationship with the lender ends the moment you back the loan in full. However, you must ensure that you have a steady inflow of funds for making monthly payments for debt financing.
Equity financing
EJ Dalius is no stranger to equity financing. Firms known as venture capitalists have a complete infrastructure for lending or investing in businesses after undertaking due diligence to ascertain the worth of potential investment. The firm has lawyers, partners, accountants, and investment advisors who evaluate the potential company and make investment decisions.
Wealthy individuals can turn into angel investors who are keen to invest a small sum in a specific product instead of building a business. Like some individual software developers who require funds for developing a product, they are the best option for entrepreneurs. Angel investors prefer less complicated investments with simple terms and like to move fast. The investors being partial owners of your company, you need not pay back the money, and there are no monthly payments. However, you must be ready to part with your business by inducting the investor as a partner who can exert control on your business.
Off-balance sheet funding
This financing method consists of creating a legal entity that helps to camouflage large debts of the company by keeping it off-limits from the balance sheet. An example of such funding is leasing expensive equipment by a company by creating a special purpose vehicle (SPV) instead of buying it.
However, this type of financing is highly regulated and part of the GAAP accounting principles.