Comparing Various Small Business Financing Options

Posted on 5 June, 2020

When a business is starting out, the need for adequate financing becomes paramount. Some business owners take out loans or credit cards without researching different financing options for small businesses. Other businesses may turn to organizations that specialize in funding with equity, or use other small business Financing options.

Having a good understanding of what kind of financing options are available can help small businesses with their long-term goals and their short-term challenges. The right kind of financing can help to provide the funds needed to operate efficiently while also taking care of day-to-day needs, like obtaining the best business insurance, hiring the right staff, and meeting the business’s financial goals.

Equity financing, for instance, is a method of pooling funds from investors to finance a business. This includes raising money by offering small portions of a company (i.e. shares) to investors. However, there are many different equity financing, and business financing, options that small business owners can pursue.

So, what are the best options of small business financing?

Initial Public Offering (IPO)

An IPO takes place when a business has decided to turn public, offering up initial shares on a publicly-traded market, like NASDAQ. This type of funding requires that a company acts in compliance with the Securities and Exchange Commission (SEC), requiring that the IPO be registered and approved.

After approval, a company needs to ensure that investors are aware of the shares that will be dispersed on a given date. This happens when a company publishes a prospectus and starts to attract more investors.

Angel Investors

Angel investors are investors with major assets that provide financing for small businesses and startups. These are wealthy business personalities or groups who are looking to invest in a small business that has the potential for a high return on their investment (ROI). Some angel investors or groups seek out early-stage companies for investing in and provide operational knowledge and support to startups.

Venture Capital

A venture capitalist firm provides funding in exchange for part ownership of a business. VC’s focus on high rates of return when they invest their funding. In contrast to angel investors, VC’s don’t use personal funds for investing in startups. Some venture capital firms may request a seat on the board of directors, which can help them manage their investment.

Small Business Investment Companies

The Small Business Administration (SBA) is in charge of giving licenses through a program called the Small Business Investment Companies (SBIC). This program’s sole purpose is to provide funding to small businesses. This option is a go-to for small businesses, but it is a competitive one that can end up being a long, drawn-out process of securing small business equity financing.

Mezzanine Financing

This is a combined option that utilizes both debt and equity. The mezzanine financing lender makes a loan and the company ends up paying the loan back under certain terms. During a mezzanine financing loan, the lender can create specific terms, such as financial performance requirements for funding. Additionally, they can operate from a high cash flow ratio or a high shareholder equity.

This kind of financing option gives a borrower a lower debt to equity ratio, which can be a positive for potential investors because a low debt to equity ratio means a small business comes with lower risk than other ventures.

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