How to Finance a Business

At some point, your business will need to access capital through business financing. For small businesses, finding a suitable funding model is vital. Take money from the wrong source and you could find yourself into repayment terms that stint your growth or you may even lose part of your company.  

Types of Financing 

Debt Financing: Debt financing comes from a bank or some other lending institution. When you decide you need a loan, you go to the bank and complete an application. The bank will check your business or personal credit rating and likely will ask you to complete other due diligence along with your business credit history. 

Equity Financing: If you have watched ABC’s SharkTank, then you have seen equity financing in action. It comes from investors, often called venture capitalists or angel investors. A venture capitalist is usually a firm rather than an individual. The process may be slow and the deal complex. Angel investors are wealthy individuals who want to incest a smaller amount of money into a single product instead of building a business.  

Mezzanine Capital: This combines the best features of equity and debt financing. Although there is no set structure for this type of business financing, debt capital often gives the lending institution the right to convert the loan to an equity interest in the company if you do not repay the loan on time or in full.  

Off-Balance Sheet Financing: This is a way to keep large purchases (debts) off a company’s balance sheet, making it look stronger and less debt-laden. It’s strictly regulated and generally accepted account principles (GAAP) govern its use. It’s not appropriate for most businesses, but it may become an option for small businesses that grow into much large corporate structures. 

Of course, funding can come from alternate sources such as from family and friends, tapping into your retirement account or by selling shares in your company. Be sure you consult with your team of professionals (banking, legal, accountant) to help you make the best decision for your personal situation.