Just as we have different phases in life, we have different phases in a business journey. And in each phase the needs and requirements are different; be it in form of resources, manpower, or capital. As we are here to tell you about different types of financing options, we are going to talk about capital needs. Every business requires extra capital at different stages in the business cycle; sometimes for the marketing, sometimes for launching a new product and, sometimes for the survival or maintenance of the business. The growth of the business also depends on the capital they have in form of revenue or loan. And to have that capital, in case the business is not growing as expected, there are plenty of readily available options. But the important thing to understand is which one is the right financial option for you. Once you understand this point in detail, you can make the right decision as all these financial options look similar on the surface but when you go deep and try to understand them objectively, you’ll find a huge difference in terms of repayments, terms & conditions, processing etc. Let’s learn more about these financial options for a better decision.
Before we go deep in understanding the financing options, let’s learn the basics. So, in any business lifecycle, there are broadly three stages – incubation & acceleration, growth and maturity. And at each stage, different kinds of financing solutions are available. Now, understanding which financing solution is suitable for your business based on the industry you are in, your financial performance and the stage you are at is crucial because this will help you identify which type of financial option you qualify for.
So, broadly there are two major types of financing solutions – Debt and Equity-based.
In the debt-based financing solution, you are provided with the capital you require and you repay the amount over time with interest irrespective of your business performance. Here, the financier will consider a few things before lending you the money such as your credit history, credit score, business history, gross revenue etc. Once the financier is satisfied with all the information he requires he lends you the capital that may be lesser than that much you require. In debt-based financing, the financier doesn’t hold any stake in your business and doesn’t interfere in any decision related to your business.
In an equity-based financing solution, the financier lends you capital in exchange for ownership of your business in the form of shares or equity. Since the investor becomes a part of the business, you are not required to pay the interest and you also get access to the investors’ network.
Now, let’s understand what are different types of financing options are under Debt-based financing and Equity-based financing solutions.
Types Of Debt-Based Financing Solutions
- From Friends and Family – Though only a limited amount can be taken from family and friends, at the time of need, this option can be considered and the amount can be paid later when then sales are done with some interest.
- Bank Loan – The loan can be taken from the banks which can be for a short term or long term. But is important to consider that in the long term loan, though the time to repay the amount is longer, the interest rates are quite high which makes you pay more.
- Credit Cards- The credits cards can be used to cover the short term requirements and the amount can be paid at the end of each month with some small amount of interest. But in case you are unable to pay your credit card bills on time, this leads to a high interest rate and penalty on the unpaid amount. This also affects your credits score eventually.
- Merchant Cash Advances – Here the merchant gives you the cash you require in exchange for your future credit cards/debit cards sales and earnings which makes it quite flexible. This is a good option for those businesses that have less-than-perfect credit scores and use card terminals to take payments from customers.
- Line of Credit – Here there banks or individuals or some institutions offer a defined amount that can be accessed as and when required and once the offered amount is over, the repayment can be made with interest. Once the repayment is made, the defined amount can be accessed again until it gets consumed.
- Venture debt – It is a type of loan that is offered by the banks or non-bank lenders to venture-backed businesses that are in their early stages but has high-growth potentials. It is used as a complementary method to equity-based financing.
Types Of Equity-Based Financing Solutions
- Angel Investors – In this financing solution, the wealthy investors offer an amount to the business in exchange for stakes in the company which they think have high potential to generate great returns in future. Along with the capital, they also provide support through their connections, network and skills.
- Crowdfunding Platforms – Here the members of the public invest in a business that they think have innovative ideas and in hope that they will earn this amount back with returns in future. But this way, the control on the company is less along with a lower share of profit. You also let them interfere with your business and related decisions.
- Venture Capital – Here the investment is made with a large sum of amount in the businesses whose growth look promising at a rapid pace. But the investors will receive a larger stake in the company.
- Initial Public Offerings (IPO) – The well-established companies go public and raise funding through IPO where they offer their shares to the public for tracing in the capital market.
Now as you have understood different types of financial solutions, it’s time you ask a few questions to yourself for making wise decisions. The questions could be related to:
- Needs– Whether you have an immediate need of capital, or it’s a short term need or you need capital to fulfil your long term needs such as new product launch, hiring etc.
- Control – Whether you are ready to lose control over your company and let others interfere in the business operations.
- Time – How much time do you have to raise the funds?
- Beyond Money – Is it only money that you require or something else such as networks, connections, skills etc.
- Opportunity Cost – Raising funds is a time-consuming process and may affect the growth of your company so it is important to keep in mind the time you will be able to give to your company once you start focusing on the financial solution. You shouldn’t lose what you have in hope of getting something better in future.
Once you think thoroughly about these aspects, you are ready to decide on your business growth.