Small business finance is the funding of businesses by others. Those individuals, usually the owners of the business, are the investors in small business finance. Equity capitalizing is a way of small business finance, which consists of borrowing money from others, usually your existing investors, and raising funds by selling parts of your business, also known as shares, to these investors. This allows you to keep your profits.
Many small businesses are started this way; through venture capital. Venture capital is a financial investment by individual entrepreneurs or groups of venture capitalists, with the goal of helping a start-up company achieve its goals. In return for this investment, they take a partial or full control of the business if it becomes successful. The advantages of venture capital are that it allows early access to new products, higher returns, and it is often paid out very quickly.
Another small business finance option is to obtain trade credit, which essentially means that you can charge for the use of your inventories and can receive reimbursement from suppliers. You can use trade credit in conjunction with other small business finance options, such as loans from venture capitalists or banks. However, to get the best deal on trade credit, it is wise to seek advice from professional credit transaction advisors who know how to manage the different aspects of small businesses.
Another option available to a small entrepreneur seeking financing is to obtain debt financing. Debt financing works like a partnership, with the debt investor as the partner, rather than the business. Small entrepreneurs typically prefer debt financing to venture capital because it does not require the entrepreneur to have a large amount of collateral. Additionally, debt financing allows early access to products that have become popular with customers, as well as the option to repay the loan early, if necessary.
Venture capitalists might offer small business financing through equipment leasing companies. Equipment leasing companies make money by collecting monthly lease payments from small businesses. These companies use the money collected from the lease payments to buy the necessary inventory that the small business needs to remain competitive. Venture capitalists might offer equipment leasing companies as part of package financing for small businesses, but this is dependent upon the venture capitalist’s overall strategy for financing small businesses.
Equipment leasing companies can also obtain trade credit from financial institutions that issue trade credit cards. Many of these trade credit cards allow small business owners to add up to five credit card accounts to their business credit cards at one time. This makes it easier for a business owner to add up to seven or eight years of credit history to their business credit cards. The benefit of this type of financing, however, is that it does not require the entrepreneur to have significant cash on hand. Equipment leasing companies might be able to provide entrepreneurs with financing options that are not available to them through traditional forms of small business financing.
Entrepreneurs should also keep in mind that some debt financing options do not allow entrepreneurs to trade equity in their company. When an entrepreneur has substantial equity in a company, however, they may be able to trade equity in that company for debt financing. Capital from existing shareholder equity can also be used to obtain debt financing. However, this option may not be as attractive as trading equity for debt financing because it may not always provide complete repayment flexibility.
Small businesses should also look into accredited investor financing. Many accredited investor firms provide small business owners with equity capital, but in exchange, they receive voting rights and other special advantages. This type of equity deal allows small business owners to raise money without having to raise a large amount of money through conventional means. They will have more equity than the value of the shares they own, but they will still have some trading leverage with the shares. This special trading advantage can make investors eager to purchase shares of the small business they are investing in.