The Most Common Sources of Business Financing Explained

Starting a business requires planning and preparation - including securing necessary funding. Learn about 5 common sources of business financing here.

The Most Common Sources of Business Financing Explained

Starting a business is an exciting endeavor, but it can also be a daunting one. It requires a lot of planning and preparation, and one of the most important steps is to secure the necessary funding. Bank loans are the most used source of funding for small and medium-sized enterprises, but there are many other options available. In this article, we'll explore the five most common sources of business financing and how to make the best choice for your business. Financing personal savings is the most common type of financing for small businesses.

The two problems with this type of funding are how much personal savings you have and how much personal savings you are willing to risk. If you don't have enough savings to cover your business expenses, you may need to look into other sources of funding.Angel investors are generally wealthy people, like friends and family; you just don't know them (yet). Today, there are about 250,000 angel private investors in the United States who fund more than 30,000 small businesses each year. Angel investors can provide a great source of capital for businesses that need a smaller amount of money to get started. Venture capital funding is an appropriate option for companies that are beyond the start-up period, as well as for those that need a greater amount of venture capital to expand and increase their market share.

Venture capitalists and venture capital firms are professional investors who are more involved in business management and play an important role in setting milestones, objectives and providing advice on how to ensure greater success. Banks and other commercial lenders are popular sources of business finance. Most lenders require a solid business plan, a positive track record, and a lot of collateral. They are usually hard to come by for a start-up company. Once the business is up and running and profit statements, cash flow budgets, and net worth statements are filed, the company can request additional funds. Small businesses can get money through equity financing or through debt.

Equity funding means that you sell shares in your company to a buyer, who then has a stake in the ownership of your company. Debt financing means a loan: you owe the person who has the debt (usually a promissory note) the amount borrowed. Family and friends can be an excellent source of start-up capital for a company. This involves talking to your circle of contacts and asking if anyone would be interested in investing in your business idea. If your friends and family believe in your idea, they may be willing to part with some money for an investment.

When taking this approach, you should take care that it doesn't ruin your personal relationships. The Small Business Administration (SBA) is a government agency that makes it possible for people to get money for small businesses. These loans have simpler approval standards and offer competitive rates and terms. Venture capitalists and angel investors could also provide you with the money you need to get started. These are people who like to invest in starting businesses. Credit cards are often the most common funding source chosen by entrepreneurs, according to a report by the SBA.

With this in mind, you should study the benefits and drawbacks of each funding option and select the ideal one that will help you meet your business objectives. Applying for a loan at a community bank is another option for small businesses that may not yet have proven creditworthy. Equity funding means exchanging a portion of the company's ownership for a financial investment in the company. In addition to explaining your business and your strategy for success, your plan should determine how much money you need and what it will be used for. Venture capital investors prefer companies that have a competitive advantage or a strong value proposition in the form of a patent, a proven demand for the product, or a very special idea (and that can be protected). Many successful entrepreneurs and startups have used bootstrapping as a way to grow their businesses without giving up control to other investors. Now that you understand the basics of funding sources for small businesses, contact an experienced small business lawyer today to learn about your state's laws and how to make your dream business a reality.

Don't make costly mistakes; help your company do its best by getting legal advice from an expert.