Types of Financing Available For Businesses and Why You Need Them

Types of financing for businesses

Many CEOs of small and medium enterprises (SMEs) often complain about the lack of small business funding options, which they need so that they can grow their business and take advantage of investment opportunities that give them profitable returns. Due to the significant levels of uncertainty and risk that SMEs are believed to have, they are seen as a less appealing investment prospect than many others. As a result, investors are hesitant to invest in SMEs because they are concerned about how their funds will be used and the returns they will receive. In actuality, there are several possible types of financing available for businesses, such as:

1. Owner, family, and friends

For starters, looking at the nearest source can prove quite beneficial in terms of getting financing for a small business. These people may be able to accept lesser returns compared to other investors, as they have reasons other than the financial one for investing. However, not many SME owners are able to raise as much as they need by themselves and with the aid of family and friends.

2. Angel Investors

Angel investors are rich individuals who do not mind the risks associated with investing in SMEs. They are one of the best financing options for a business, especially new ones. Not only is their money useful for businesses, but they also often act as advisors due to their experience in the field and will be able to provide beneficial contacts. However, there are few of them and many aspiring SMEs.

3. Trade credit

This is basically the business taking the supplies from their suppliers on credit and paying them when the business has seen returns. However, the riskier the SME profile is deemed to be, the harder it is to extend the credit period limit.

4. Invoice factoring and discounting

Both of these methods are a way to gain an advance against unpaid invoices. Invoice factoring allows an SME to sell their unpaid invoices, while invoice discounting is a loan secured against outstanding invoices. The main difference is who collects the unpaid invoices. The factoring company will purchase unpaid invoices and take over collection in invoice factoring, while in invoice financing, the SMEs retain control of collections. In both cases, businesses are advanced up to 80% of their unpaid invoices upfront.

5. Leasing

If you are a new business, consider leasing tangible assets to begin with, rather than buying them outright. This is a huge means of savings in terms of business costs. The money saved can then be invested into growing the business.

6. Venture capitalists

Some companies have significant cash holdings to invest in, and they offer capital to companies that have high growth potential, in return for equity stakes in the business. SMEs that have a large potential market, as well as unique products and services, have a high chance of getting venture capitalists to invest in them, as they expect a high return of investment.

7. Supply chain financing

This method is often confused with invoice financing. While it offers a cash advance just like invoice financing, the advance depends on the credit ratings of the companies that are in the supply chain. The higher the credit score of the SME, the lower the financing cost. Once the supplier receives an order from a business, they fulfil the order and send the invoice. The SME accepts the invoices and agrees to pay them upon maturity to the financial institution. The supplier then sells this invoice to the bank at a predetermined discount rate and receives payment right away, and the SME proceeds to pay the bank at the maturity of the invoice as agreed. This is a great way of stabilising the cash and supply flow.

Financing is the core of any business’s success, from creating a network of investors to interacting with other entrepreneurs. Financing is always available, but the important thing is knowing how to get financing for a business, be it small, medium or big. If you want to secure funding for your business, you need to take crucial steps by engaging with the appropriate investors and being deliberate and convincing in your pitch. Let the investors know exactly what they can expect to gain from investing in your business. Choose your investors wisely, because they are not just a source of financing, but also what will motivate your business to grow and succeed.

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