Research Guides: Small Business Financing: A Resource Guide: Types of Financing (2024)

FAQs

What type of financing do small businesses use? ›

Small businesses typically use debt or equity financing — or a combination of the two. Debt financing involves borrowing money from a third party, which you then repay, with interest. Equity financing, on the other hand, means you receive money from an investor in exchange for partial ownership of your company.

There are two types of financing: equity financing and debt financing. The main advantage of equity financing is that there is no obligation to repay the money acquired through it.

Personal Savings/”Love Money”

The greatest percentage of businesses are financed for start up using personal savings. The most obvious advantage of using personal savings to start up or expand your business is that you relinquish no control over your business.

This could be equity finance – investment; debt finance – loans/overdrafts; grants. They may well be willing to help lend money to a new business starting up. This can be particularly good if they don't want any interest repaid on the loan that they make to you.

The finance field includes three main subcategories: personal finance, corporate finance, and public (government) finance. Consumers and businesses use financial services to acquire financial goods and achieve financial goals.

The sources of business finance are retained earnings, equity, term loans, debt, letter of credit, debentures, euro issue, working capital loans, and venture funding, etc.

CONVENTIONAL LOANS

Conventional home loans are still the most common type of loan, accounting for two-thirds (66%) of all mortgages.

Government Funding

These are the most popular forms of small business financing, particularly the SBA's 7(a) and 504 small business loans. SBA loans are fixed-rate, fixed-term loans that must be repaid. Certain loan products may also have restrictions on how small business owners can use the proceeds.

The main sources of short-term financing are (1) trade credit, (2) commercial bank loans, (3) commercial paper, a specific type of promissory note, and (4) secured loans.

Small businesses can get money through "equity financing" or "debt financing." Equity financing means that you sell stock in your company to a buyer, who then has an ownership interest in your company. Debt financing means a loan -- you owe the person who holds the debt (usually a promissory note) the amount borrowed.

What are the methods of financing? ›

External sources of financing fall into two main categories: equity financing, which is funding given in exchange for partial ownership and future profits; and debt financing, which is money that must be repaid, usually with interest.

And under equity funding, there are three types of funding which are Venture Capital funds, Private Equity funds, and Angel Investors. While looking for the right types of funding and investors, the company should raise funds from firms that have both the extensive network and subject matter expertise in the industry.

Financing and Funding

When it comes to infrastructure investment, these are two separate concepts. Financing is defined as the act of obtaining or furnishing money or capital for a purchase or enterprise. Funding is defined as money provided, especially by an organization or government, for a particular purpose.

Small business financing (also referred to as startup financing or franchise financing) refers to the means by which an aspiring or current business owner obtains money to start a new small business, purchase an existing small business, or bring money into an existing small business to finance current or future ...

A small business loan gives you access to capital so you can invest it into your business. The funds can be used for many different purposes including working capital or improvements including renovations, technology and staffing, business acquisitions, real estate purchases and more.