The Different Forms Of Small Business Finance

Any small business owner in operation today is actually an incredible and solid form of business ownership as well as being an integral part of the growth and health of the economy. Quite often, when public policy and economic decision making is undergone, they look at small businesses to see how they are faring and able to withstand the various different amounts of strain and tensions that the economy is being placed under. An incredible stress of any business is the financing options available to them which requires the knowledge of the various types of small business finance.

With any level of business financing, there are actually an incredible amount of options available that provide an incredible source of financing overall. Businesses must keep a very close eye on their options at all times in order to remain competitive and thing strategically regarding how they are able to move forward. Thus, understanding what all options are at all times is definitely a crucial element in this process.

Truly, at all times, any small business must maintain a solid grip on their cash flow. Being a good cash manage is often crucial for maintaining a level of financial well being as well as not having to depend as much on financing at all. Thus, this should always be a foundational business model process.

Debt financing is actually an incredible common form of small business finance available. Basically, this is where the finance company purchases the debt acquired by the business in exchange for repayment with interest. This is often performed at early stages of any small business.

For those that need more cash flow, business loans are actually often a very common source of business financing. This is basically much like a personal loan and requires a solid credit standing as well as an incredible amount of potential. This should actually be something that is reserved for the harshest of economic times for any business.

Investment in any business is also another incredibly common form of small business finance. Basically, this is something that involves a great deal of word or mouth and branding before it is offered to any company. Most businesses use this investment cash for expansion and upgrades to help the business grow and run efficiently over time.

Another form of business finance is through equity finance. Most often, this type of funding requires a decent level of credit standing as well as a very solid forecast of growth and potential to attract equity financiers. In this process, the business owner relinquishes a level of their ownership in the company in exchange for a set amount of financing that requires repayment and constant reporting to the equity finance company.

Finally, venture capital is often used as business finance for those wishing to take their business to the next level. This is acquired when a business is beginning the process of going public and wishing to sell themselves to the market. This funding is often used to increase the overall financial outlook of the company to make it more attractive.

Understanding Small Business Finance

If you are an entrepreneur, then you know that there is always a need for small business finance to keep things going. Being able to get the money that is needed for your business means that you need to make several financial and non-financial considerations.

Firstly, before you search for funding for your business, it is important to know what type of financing required. Would the business need debt financing (a loan for running your business) or equity financing (money that is taken from savings or investors)?

Small business finance through debt financing means taking loans from credit unions, banks and other traditional financial institutions. Among the loans that are available are short-term loans which must be repaid, with interest, within a specific period of time. Such loans may be termed as demand loans as the lender can call in the loan for repayment any time. Small business finance longer debt loans are normally used for financing assets like renovations or investments in equipment.

There are many businesses that make use of lines of credit as a source of small business finance. They make arrangements with lending institutions for a set amount of available credit that they can draw upon when need arises. Lines of credit allows businesses to use the cash when they need it and they only need to pay back the amount that has been used and interest is paid on the outstanding balance of the line of credit. Numerous lending institutions offer credit cards as a means of small business financing. These cards are used by establishments to finance their operating expenses. But, credit cards can be expensive because of the interest rates. The cards are ideal for use if the balance is paid in full monthly.

Small business finance through equity is normally used in a limited manner. Informal source of equity funding includes friends and family; while the formal sources include venture capitalists. Venture capitalists generally have a considerable pool of resources that allow them to finance ventures and participate in some of the more crucial decisions in the business. However, these capitalists conduct studies before making the decision to provide funding.

The Primary Cause Of Business Financing Frustration

Finding proper business financing is not easy at the best of times for most small and medium sized business owners and managers.

There are a number of reasons that collectively explain why the business financing market can be so difficult to understand and navigate.

But probably the single biggest reason is the lack of useful information about how the business financing market actually works.

Business financing information and education sources predominantly come in two forms: 1) Text books; 2) Major bank advertising.

If you’ve ever read through a educational finance text book or taken a business financing course, you already know how difficult it can be to apply the theories, principles, and strategies to a small or medium sized business.

Our formal education system provides limited information as to how the market place works, how to plan for financing requirements, how to manage periods of growth, decline, transition, start up, etc.

Sure academic books and courses can go through all these areas in great detail, but is the information practical, real world, something you can relate to and apply yourself as a manager or owner of a small or medium sized business?

In most cases, the answer is a resounding NO.

Most finance text books speak to big business financing dynamics that are not easily transferable to small and medium sized business scenarios.

Outside of the formal education system, the next great source of business financing information is the information provided by the major banks, which they tend to make available to you by the boat load through their broad based marketing campaigns.

Unfortunately, the information by itself seldom helps you determine if a particular institution would be able to provide you with financing, or what would be required to qualify for a loan.

The good news is that business financing sources continue to grow in numbers as more and more lenders carve out a particular piece of the market to service.

In order to take advantage of these alternatives, you need to have a solid approach in place when seeking business financing.

Here’s a short list of things to consider

>>> Develop a solid, ongoing, understanding of both your personal and business assets, income, and cash flow.

Regardless of the business financing model, these elements will always come into play to some degree.

Being able to demonstrate a solid understanding of your business financials is also an indication of your ability to manage the underlying business.

>>> Monitor and manage your personal and business credit.

Small and medium sized business financing is focused on both personal and business credit histories.

Regular reviews of both personal and business credit reports from the major credit reporting agencies are important to avoid errors and credit practices that can severely damage your borrowing power.

>>> Develop your marketing position.

Yes, seeking business financing is a marketing exercise.

When applying for business financing, you’re marketing your business to lending sources and they in turn are marketing their business financing programs to you.

Think of the lender as a customer to better understand what they’re looking for. Then, develop a business proposal that addresses all their potential needs and concerns.

>>> Research Lending Sources

There are lots of business financing sources. But there is also lots of variation in the types of business applications each one is prepared to consider.

Broad based lenders rely on credit history and net worth. As you get more specific in terms of financing application and industry, lender programs become more narrow and can be harder to locate.

You need to consider things like industry, sector, and geography when looking for business financing sources.

Financing consultants and business loan brokers can be an excellent source of information to aid you in this process.

>>> Qualify The Lender

Before you make a formal application, find out if the lender has the programs and lending track record to meet your specific needs.

Too often, the lender is doing all the qualifying.

>>> Compare your options

Depending on the scenario, there can be several financing strategies that could work for your business.

Make sure you take the time to compare before making a decision. The extra time spent could save you considerable time and money in the long run.

>>> Start Today

Regardless of what your business financing needs are right now, you should regularly invest time staying on top of your business financials, monitoring your credit, and researching financing sources that fit your industry and potential future requirements.

When the time comes to acquire capital, your proactive efforts can make all the difference in getting the capital you need with terms and timing that are acceptable to your business.

Small Business Finance Success Improves With Realistic Options

The goal of being realistic when seeking new commercial loans and working capital financing will help commercial borrowers avoid a number of commercial finance problems. With proper preparation business owners should be in a better position to obtain new financing despite the difficult challenges impacting most working capital loans and small business financing. Nevertheless it should be anticipated that terms of financing will be different from prior commercial financing. Because of recent commercial lending difficulties, business owners actively assessing the most effective options for their small business finance decisions are likely to find the smoothest path to business loan success.

In view of volatile conditions which have recently impacted credit markets, this will not be a simple task. A very common example of the problem is illustrated by how much misinformation and confusion there has been about business financing and working capital availability. Getting more accurate information about what is realistically possible can be one of the most difficult challenges for commercial borrowers.

When seeking to identify realistic choices in a confusing working capital management climate, a number of harsh realities must be confronted by all small business owners. For most current commercial financing decisions by business owners, there are several major factors to anticipate. In the first example, additional small business loan collateral is being requested by most commercial lenders. Second, many regional and local banks have discontinued lending for business financing and working capital. In a third example, businesses which are not currently profitable or not current in their debt payments will have extensive difficulties. Fourth, business construction funding currently is very limited in most areas. In a fifth example, lenders are eliminating unsecured business lines of credit for most small business owners.

Despite the new business financing limitations just noted, there are practical working capital options for small business owners to consider. An increasingly effective commercial financing option in the midst of an uncertain economy is a merchant cash advance program based on credit card processing activity. Even though this commercial funding option has been available for a few years, it has not been used by most small businesses. For most businesses which accept credit cards, merchant cash advances should be evaluated as an important tool for improving business cash flow. Small business owners wanting to pursue this financing option should consult a business financing expert who is knowledgeable about this working capital management approach as well as other small business loans.

Even though working capital loans are not as widely available as they were just a few months ago, this kind of small business financing is still in fact obtainable. Since some of the largest providers have stopped making these business loans, the main change for business borrowers is the likelihood that they will be dealing with a different commercial lender. Small business owners will benefit from finding an experienced and candid business financing expert to assist in evaluating realistic options because the most effective working capital financing providers are not aggressively marketing this capability.

As stressed above, when making commercial financing decisions it is becoming increasingly important for business owners to first determine their effective business finance funding options. Because of recent volatility in financial markets, this task is likely to be much more difficult than most commercial borrowers realize. It is advisable to explore commercial finance options that might be necessary if economic conditions change even further even for business owners who are satisfied with their current working capital financing arrangements. The use of Plan B contingency financing is an important tool to assist commercial borrowers in this process.