8 Sources of Finance for Small Businesses To Know

There are various sources of finance for small businesses. These sources of finance for small businesses can be categorized into two; equity and debt source of finance. An equity source of finance is the source of finance that involves offering a part of ownership interest in the business. While a debt source of finance is the source of finance through a loan on which interest is payable. This article explains the sources of finance available to small businesses.

Various Sources of Finance for Small Businesses

Savings

This is the source of finance raised by the owner of the business through personal savings. The owners of small businesses can raise funds through their assets like jewelry, real properties, stocks, mutual funds, and others. So, if you are the owner of a small business you can sell your assets or obtain loans on any of your assets to raise capital for the business. You can decide to give such capital to the business as a loan or equity capital. This shows your long-term commitment to your business.

Family and friends

This is the money raised to finance a business from rich members of the owner’s spouse, parents, siblings, and friends. This can be in the form of a loan or equity. Meanwhile, when raising capital for business from family and friends. it is should be based purely on a business relationship.

Angel Investors

Angel investors are wealthy individuals with financial resources to directly invest in small companies owned by others. In some cases, angel investors always worked as a team to pool their resources together to finance small companies. Angel investors also contribute their networks, experience, management, and technical knowledge to the business. They always maintain a low profile and you have to search the internet or contact specialized associations to meet them. So, angel investors are involved in the management of the company for supervision. Therefore, they always have a seat on the board of directors. Angel investors usually finance startups with investments between $25,000 to $100,000.

Read Also: 6 Possible Ways To Invest Your Money in 2021

Venture capital

Venture capital is the source of finance raised from private equity firms called venture capitalists. These capitalists provide funds for companies that are at the early stages of the business cycle or during expansion or when major changes are expected as a result of new products. So, they are interested in companies with high growth potential in a certain industry like the technology and communication industry. They provide capital to finance the business in exchange for a part ownership interest of the business (i.e. equity). However, they usually finance companies with an investment of up to $10,000,000. Also, they involve in the management of the company like angel investors. The major difference between venture capitalists and angel investors is the organizational structure and size of deals according to financial experts at LBO Advisers.

Trade credit

Owners of small businesses can finance their business by buying goods on credit from willing suppliers. This source of finance helps to fulfill the short-term financial needs of the company. It is a less expensive source of financing small businesses.

Government grants and subsidies

Government can finance small businesses in the form of grants and subsidies through its appropriate agencies. However, your company has to meet the required conditions to get government grants and subsidies. So, you need to provide a detailed explanation of the project, its benefits, work plan, total cost, experience, and background of the key managers.

Bank loans

A bank loan is the most common source of finance for small businesses. Most of the banks have special credit facilities for small businesses. But, every bank has minimum requirements such as credit scores, annual turnover, and others to meet by the company to qualify for a bank loan. However, the company has to choose between different types of loans. These include working capital loans, and others provided by banks. Your company needs to have a soundtrack record, an excellent credit record, and a solid business plan to obtain a bank loan.

Crowdfunding

This is a relatively new source of finance for small businesses that gained popularity due to the rise of social media to easily reach a large number of people throughout the world. It involves raising funds from numerous small contributions from a large group of individual investors. However, this involves running an equity-based or reward-based crowdfunding campaign. With an equity-based crowdfunding campaign, investors have part ownership of the business. While a reward-based crowdfunding campaign gives the investors the right to receive certain rewards for their capital. It is an excellent source of finance that requires significant preparation and marketing strategy to be successful.

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Conclusion

When you are contemplating on how to finance small businesses. It is important to consider the suitable sources of finance for small businesses. In choosing the best sources of finance for a small business, the business owners need to consider the cost and benefits of various sources. If you are in need of a business or personal loan without any collateral, BadCreditLoan provides quick loans for business and personal needs without any collateral in just 3 steps. To apply for it, click here

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