Starting and running a business requires capital. The source of that capital can be variable depending on which stage a business is in. Below is a quick rundown of the most popular methods of business financing.
Angel Investors
Angel investors contribute money, typically to fledgling businesses, and they do so because they want to see the company or owner succeed. The money does not generally have to be repaid, but investors may want some equity share or other remuneration.
Bank Loans
Banks and credit unions offer the widest variety of financing and at some of the best interest rates. These loans are highly competitive today, however, with the majority of applicants being rejected. The highest credit is usually required.
Business Credit Cards
Almost any business can acquire a business credit card account. This is a way to finance small amounts over a short amount of time, but the interest rates can be pretty steep.
Crowdfunding
Websites like KickStarter.com provide entrepreneurs with an opportunity to appeal to groups of investors with promises of things like advance access to products, gifts, bonuses or discounts. The difficulty is in getting enough funding to reach the target financing goal.
Family and Friends
Although it can put a strain on relationships, family and friends are often the most available source of business funding and often provide the most lenient terms.
Merchant Cash Advance`
These short-term loans are made immediately and can provide significant capital, but the repayment terms include giving up a portion of future sales. Annual interest rates can run over 100 percent.
Microloans
Microloans are loans for no more than about $50,000 and target specific underprivileged demographics and areas. While availability is limited, the interest rates can be very low.
Online Short-term Lenders
Online lenders like Ondeck.com specialize in quick, easily-accessible loans. Borrowers with almost any type of credit score can make use of these but the annual interest rate can be between 50 percent and 130 percent.
Peer to Peer (P2P) Lending
Lenders like Prosper.com and LendingClub put business owners in touch with individuals who are interested in investing. No collateral is required but funding may be in limited amounts.
Small Business Investment Research (SBIR) Grants
The federal government has created grants for specific industries and projects. They are very limited and require a lot of paperwork, but can be the perfect boost for the right companies.
Supplier Financing
Some businesses can turn to their suppliers for delayed repayment schedules. This allows the company to resell the product before payment is due, cutting down on the amount of working capital needed.
Venture Capitalists
VCs want to invest in companies with great potential to grow and make money. They will give infusions of cash in exchange for equity and some control over the business.
This is not an exhaustive list of financing sources, but most businesses will be able to fund their capital needs from at least one or more of these means.
