“A big business starts with small”
At the time of starting, every company has faced many problems like financial, marketing, time management, and administration. Out of all these problems, financing is a very big problem. Because there’s very little source of finance is avaiable. A business wants lots of money to perform its day-to-day activity. Without money, a business can not survive for a long time. So let’s find out some sources of small business financing.
Precap: sources of small business financing
What is a small business?
Sources of small business financing
Sources Of Small Business Financing
Below are some sources of small business financing.
This is the easiest source of small business financing. A business person can invest like personal capital in their business as equity capital, and they can give loans to their own company.
When a business needs money, a businessman can tap into his personal assets like jewelry, stock, real estate, and mutual funds to raise money. He can sell the assets to raise money or take a loan on any assets.
Venture capital is a type of financing that investors provide to startups and small businesses that are believed to have long-term growth in the future.
Businesses mostly attract venture capital if they have an immediate opportunity for growth. Venture capitalists also provide guidance to small businesses. They analyze business, financial statements and other business details to determine the overall expected return on investment before investing in a small business.
Friends and family:
It’s possible that your parents, cousin, friends and other close family members who have extra money to lend will finance your business. They might be ready to acquire an ownership position in the business and give the money to the business as a loan.
Providing a loan is an essential function of a bank. Businesses have to qualify for the bank’s minimum criteria. Every bank has its own criteria regarding annual turnover, credit scores, earning potential, etc., to get a loan from the bank. Banks offer different types of loans like:
- Unsecured Business Line of Credit.
- Cash Secured Line of Credit.
- Secured Business Line of Credit.
- Secured Business Loans.
- Unsecured Business Loans.
also read: Bank As A Service Provider
Many people think that venture capital and angel investors are the same, but they are wrong. There are some differences between venture capital and angel investors.
A venture is a large and established company that invests in small businesses by trading equity for capital. An angel investor is an individual who invests in a startup and small business that may not have the confirmable growth that venture capitalists want.
If a business cannot get a business loan, the business might consider getting a personal loan to use in its business. For business loans, The businessman must have a good credit history for raising a personal loan. They can get a personal loan by mortgaging homes, jewelry, and other types of assets.
Community development finance institutions:
Community development finance institutions are lenders with an objective to provide fair, responsible financing to rural, urban, Native, and other communities that ordinary finance doesn’t traditionally reach.
Many non-profit community development finance institutions provide capital to small business owners on reasonable terms.
Credit cards are a financial tool that gives you a loan that you can use for everyday expenses or large purchases. Credit cards are also an easy but expensive method to get money because of their interest rate. Its interest rate tends to be high.
It is a good source of finance for small-scale revolving needs and for business people who want to retain ownership and control of the company.
Private equity firm:
It is a type of equity capital that is not listed on any stock exchange. Private equity firms raise funds for investors. They invest these funds to buy the capital of promising startups and small businesses.
The private equity firms will acquire a controlling position and substantial minority position in a business and then look to maximize the value of their investment.
It is a way of raising money for businesses. It enables fundraisers to collect money from many people via online platforms. Crowdfunding is used by startups and
small, growing businesses as a way of accessing alternative funds.
Crowdfunding is a new method of raising funds when considering the source of funds.
Small business loan
Loans can help you start or expand a business and keep it afloat during a disaster. Here are some small business loans.
They delivered more than $13 billion in financing to more than 425,000 customers and businesses. They focus on small businesses, offering business lines of credit up to $250,000. The lender serves borrowers and has brick-and-mortar locations in California; Holladay, Utah; Austin, Texas; Redwood City, Jersey City, and New Jersey.
It was founded in 2007 as a platform for small businesses by connecting borrowers with lenders that offer a range of loans and lots of credit options. Biz2credit has arranged more than $7 billion in small business financing for thousands of U.S. businesses.
A platform for internet business lending called Funding Circle links investors and small-enterprise borrowers. The platform has connected 62,000 firms with $8.6 billion in investment globally.
It is an online small-business lender offering term loans and credit. The company was founded in 2006. They use digital technology and data analytics to assess the creditworthiness of small businesses. They has served more than 114,000 small businesses with more than $13 billion in loans.
It is an online financial services company that provides small business loans, credit, merchant cash advances and other loans. Rapid Finance’s small business loans can range from $5,000 to $1 million, and you can get money to your business bank account within hours of your application and approval.
Below are some requirements for a business loan.
- Operates for profit.
- Does business in the U.S. and its territories.
- Has received other funding, including personal assets.
- Has an owner with good equity to invest.
Q1. This is the cash that is generated by the business when it operates successfully
- Retained profits
- Share capital
- Angel investor
- Owner savings
Q2. Which of the statements about retained profits is false?
- You have unlimited amounts of money available
- Shareholders and employees could be frustrated because there is less profit to be ‘shared out’
- You do not have to pay interest
- You are free to use it for any purpose
Q3. Which of the following is NOT usually considered a personal source of finance.
- Redundancy payments
- Credit card
Q4. Which of the following statements about personal sources of finance is false?
- Often cheaper in the long-term
- Less ‘red tape’ or delay in getting the cash
- Less personal financial risk for the entrepreneur
- May be harder to raise large amounts
Q5. An amount of money that is paid back within an agreed amount of time, with interest.
- Bank loan
- Angel investment
- Retained profit
Conclusion on sources of small business financing
If you are confused about which loan and which sources of small business financing are best, then, Think about how much money you need and what you’re willing to give up in exchange for the money. That will help you to decide the best way to move forward.
FAQs: sources of small business financing
Que1- What are the 4 common sources of financing?
Ans- The common financing sources used in developing economies can be divided into four categories:
1)Family and Friends.
Que2- What are the sources of finance and explain?
Ans- There are various external methods a business can use, including family and friends, bank loans and overdrafts, venture capitalists and business angels, new partners, share issue, leasing, trade credit, hire purchase, and government grants.
Que3- Which is the cheapest source of finance?
Ans- Retained earning:
Retained earnings are the cheapest source of finance.