3 Types of Financing Available for Growing Businesses

business finance

A solid business plan or strategy isn’t enough to propel your organization to the next level. You may have a great product, but if you lack the funds to mass-produce it, market it, sell it, and continuously develop it, your business won’t get far.

Funding is a critical part of growth because money is needed to run a business, and it can be acquired through debt financing, equity financing, or a combination of both. So, what suits your business?

#1 Debt Financing

Funding that comes in the form of a loan or debt falls under this category. These can be bank loans, government loan programs, from your friends and family, or from revenue based financing firms.

Essentially, money is borrowed, then repaid over a period of time with interest. Of course, this course of financing has its benefits and challenges. One key advantage is you get to keep 100% ownership and equity of your business, which is particularly evident with revenue based financing (RBF). There’s no dilution of ownership and the founder retains control over their organization.

#2 Equity Financing

In this option, capital is raised by selling shares. Basically, when an investor (e.g. Venture Capitalist, Angel Investor, etc.) places money into your business, that represents some level of ownership over the company as well—quite the opposite of debt financing.

This is among the primary sources of funding for startups, especially if their product has great potential, but they lack the financial resources to develop and scale it. Equity and ownership are partially given up in exchange for capital to grow the company.

#3 Combination of Equity and Debt Financing

Fueling a business to ensure day-to-day operations continue without a hitch can often require a mix of both worlds. At the beginning of the growth cycle, you may have an Angel Investor fund your organization in exchange for shares or equity. Depending on the contract, they can either have voting powers in key business decisions or not.

Then, as you continue to grow and getting funding from existing investors (or new ones) becomes increasingly difficult, you may consider applying for a bank loan or reaching out to a revenue-based financing firm. This way, you’ll get non-dilutive funding that can support long-term growth. RBF can be a great supplement to existing equity financing models—you just need to make sure your organization’s generating consistent revenue to qualify.

How to Choose the Right Financing Option for Your Growing Business?

To find out which financing option is best for you, it’s crucial to know what questions to ask yourself and your team:

1. Is your business growing? What growth stage is it at?

2. Are you willing to give up ownership of your business or share key decision-making powers with your investors?

3. How fast do you need capital? Can you wait for the bank to approve your loan or do you need a swifter option?

The answers to these questions will help guide your decision as you weigh the pros and cons of each financing option.

This entry was posted in Finance.

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