Businesses are money-making machines, but before they can be a source of funds, you need to put in a significant amount of moolah first. It takes money to make money, right?
You need capital to get your business off the ground and more funds to continue running and growing it. When you have a business, there’s no escaping the matter of money.
This is where financial solutions come into play. Financial solutions refer to the financial products and services or financial agreements that businesses can tap into to optimize their operations and scale. They can be used to fund a startup, to purchase business assets, and to facilitate growth.
Financial solutions can come in many forms, but all have the same goal of greasing the wheels of commerce. Below are some of the most common financial solutions for businesses.
- Debt Financing
- Equity Financing
- Bank loans
- Invoice finance
- Business credit cards
- Venture capital
- Angel investors
- Crowd funding
Let’s go a little deeper in the upcoming sections below…
2 Main Types of Financial Solutions for Businesses
There are two main types of financial solutions for businesses. One is debt financing and the other is equity financing.
1. Debt Financing
Debt financing is the process by which businesses receive funding from a third party in the form of a loan, credit or debt. In exchange for the funds, the business repay the money plus interest and any fees. Business ownership remains intact.
2. Equity Financing
Equity financing facilitates the transfer of part of the ownership in the business to the third party who provides funding. So, in exchange for the funds, the business relinquishes some of its shares to the party issuing the funds. As a result, after the transfer of funds, the third party becomes part-owner of the business, but there is no obligation to repay the funds.
Debt Financing Options for Businesses
Debt financing is the most common type of financial solution for businesses, especially small and new ones. What’s great about it is the fact that it doesn’t involve equity. However, you do have an obligation to pay the principal, interest, and fees in a fixed time.
Here are some of the most common types of debt financing:
- Bank loans
Bank loans are also known as term loan, business loan, and commercial loan. Businesses apply for a loan with a bank, and if they meet the bank’s requirements, get issued a large lump sum. The repayment agreement usually entails making regular payments over a set period of time.
It can be secured or unsecured. Secured bank loans involve a collateral, which will be seized by the bank in the event of the business defaulting on its loan agreement. Unsecured loans don’t have this requirement, but they come with tighter terms and higher interest rates.
This type of debt financing, however, comes with strict lending criteria that oftentimes excludes small businesses. Plus, the application process can last several months.
- Business credit cards
These are credit cards that are issued exclusively for business use. Getting a business credit card is easier than applying for a bank loan. However, they come with higher interest rates.
Secured credit cards are also available. They make it easier for businesses with little or no credit history to get a credit card by working as a type of secured credit card where you can only charge up to the amount you deposited into the card. The deposit basically serves as the collateral and stays in reserve.
Business credit cards are great for everyday expenses and other working capital needs. It’s a good way to keep your personal and business spending separate and credit card expenses are tax deductibles. Moreover, they often come with perks like a big sign-up bonus, cash back on business purchases, travel benefits, etc. However, unlike personal credit cards, they come with fewer consumer protections.
- Invoice finance
If your business has a lot of outstanding sales invoices, you can use it to receive invoice financing. As sales invoices typically get paid after about a month, your cash gets tied up with it. Instead of waiting, invoice financing turns your sales invoice into cash you can use for your operations now.
There are two types of invoice financing. The first one is invoice factoring. It gives the bank control over the sales invoice, i.e., your customers now have to direct their payment to the bank instead of to you. In exchange, you’ll receive 85% or less of the value of the invoices. Once all of the invoices have been paid, the bank will deduct interest and fees before returning the remaining amount to you.
The second one is invoice discounting. It can provide more cash upfront than invoice factoring. In addition, the bank won’t be taking over credit collection, so your customers won’t know about your invoice discounting agreement.
Equity Financing Options for Businesses
Equity financing allows a company to receive funds without the obligation to repay. The business has to be willing to part with some of its equity, along with some control and profit, to a third party, however. In exchange, the company may gain access to investors with expertise and connections.
Here are some of the most common types of equity financing available to businesses:
- Venture capital
Another common source of equity financing is venture capital, though it may not be a viable option for small business. Venture capitalists are often on the lookout for businesses that can offer them a large return on their investment. To attract their attention and receive their funding, you should already have achieved some success with potential to grow, have to prepare a scalable business plan, and be open to having your business audited.
- Angel investors
Unlike venture capitalists who are employed by a risk capital company, angel investors use their own money to help start ventures. In exchange, the business gives them shares or part-ownership of the business. Angel investors can also bring with them connections and experience. To say yes, angel investors will need a detailed business plan and up-to-date accounts.
- Crowdfunding
Strong promotion or marketing is the name of the game when it comes to crowdfunding. You’ll have to attract the attention of people who will be your source of funds. It is a popular way to get startups off the ground, but you’ll need a compelling pitch to convince your funders to invest in your business for the long-term. Among the three equity financing options listed here, this is the most risky as there is no guarantee you can raise the funds you need.