Understanding Small Business Finance

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If you are an entrepreneur, then you know that there is always a need for small business  finance  to keep things going. Being able to get the money that is needed for your business means that you need to make several financial and non-financial considerations.

Firstly, before you search for funding for your business, it is important to know what type of  financing  required. Would the business need debt  financing  (a loan for running your business) or equity  financing  (money that is taken from savings or investors)?

Small business  finance  through debt  financing  means taking loans from credit unions, banks and other traditional financial institutions. Among the loans that are available are short-term loans which must be repaid, with interest, within a specific period of time. Such loans may be termed as demand loans as the lender can call in the loan for repayment any time. Small business  finance  longer debt loans are normally used for  financing  assets like renovations or investments in equipment.

There are many businesses that make use of lines of credit as a source of small business  finance . They make arrangements with lending institutions for a set amount of available credit that they can draw upon when need arises. Lines of credit allows businesses to use the cash when they need it and they only need to pay back the amount that has been used and interest is paid on the outstanding balance of the line of credit. Numerous lending institutions offer credit cards as a means of small business  financing . These cards are used by establishments to  finance  their operating expenses. But, credit cards can be expensive because of the interest rates. The cards are ideal for use if the balance is paid in full monthly.

Small business  finance  through equity is normally used in a limited manner. Informal source of equity funding includes friends and family; while the formal sources include venture capitalists. Venture capitalists generally have a considerable pool of resources that allow them to  finance  ventures and participate in some of the more crucial decisions in the business. However, these capitalists conduct studies before making the decision to provide funding.

There is also some equity small business  finance  that are received from people who are called as “angel investors”. These are normally people who have deep pockets and are willing to provide funding.

Different types of small business  finance  helps to increase the chance of the business to become successful.

Source by Chukwuemeka Fred Agbata

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