Starting a Small Business: Business Finance Options

Starting a small business requires capital, often on short notice. While a number of small business finance options exist, not every finance option is suitable for every small business. Before you pursue a business finance option, make sure you understand the ins and outs of each possible finance option.

Business Financing Options

While you may need to seek out a few different sources to help fund your small business, keep in mind that some business finance options are more readily available than others. The following options for small business financing are common methods of obtaining capital:
  • Bank Loans: Bank loans are perhaps the most common means of financing a small business. While bank loans allow you to negotiate for the amount you need, they also don’t leave you beholden to investors or family members who may want partial control over the business.

    Small business finances that rely on bank loans do have some disadvantages. For example, interest rates may be high if the bank considers the business a credit risk. Also, business owners often must personally guarantee the loans, meaning that this individual is responsible for repaying the funds himself.

  • Lines of Credit: Lines of credit are flexible loans that provide a number of business finance options. A line of credit allows a business owner to draw money, up to a set amount, when he needs it. This provides greater flexibility, as the company can draw on the line of credit during lean months, pay down the debt and then draw on the account again.

    The financial danger of a line of credit is that the money is readily accessible. It's all too easy for the business to max out the credit limit on small purchases and not have the account paid down when a real financial emergency develops.

    The bottom line is that a line of credit can greatly improve small business finances as long as the business owner is disciplined enough to reserve the money for major purchases.

  • Family and Friends: Depending on how much capital is required, friends and family may be of assistance when starting a business. As with personal savings, however, loans from friends and family may not raise all the capital you require.

    The downside to financing a small business with money from family and friends is often personal. Lenders may feel they have the right to participate in business decisions, and relationships may become strained if money is not repaid in a timely manner.

    If borrowing from family and friends is one of the business finance options available to a business owner, consider drawing up a legal contract so both parties know where their responsibilities and obligations lie.

  • Personal Savings: Personal savings are often used, at least in part, to generate capital when starting a new business. If a business owner can generate enough capital with personal savings, he is not tied to loan payments or beholden to investors.

    Unfortunately, however, most individuals don't have the luxury of financing their small businesses with their personal savings. Another drawback is that, even if a person does have a personal savings to invest, some may be hesitant to do so for fear that the venture may leave them broke.
Angel Investors and Small Business Finances
Angel investors are experienced business owners who provide capital to entrepreneurs starting a small business. Angel investors can lend anywhere from small to large amounts of money, depending on the needs of the small business and the angel's own finances.

Along with providing money, an angel investor can also be a good mentor for a new business owner. As you choose between possible angel investors, be sure to choose one with whom you get along, as some angels may interfere too much with business activities.

Less Common Business Finance Options

Here are some lesser known methods of financing a small business:
  • Advanced Payment: One finance option for small businesses is advance payment, in which customers of the business must pay either a portion of their bills or the entire payment before the product or service is delivered. Although this allows the business to access the payment faster, for advanced payments to work, the business must provide the service in a timely manner.

  • Rental Office Space: If a small business rents its business space, the business is likely to put improvements into the rented area. While some landlords are willing to offer lower rates for businesses that improve their properties, others are at least willing to be more flexible with rental deadlines. To make this option work, the business owner must have a good relationship with his landlord.

  • Supplier Financing: Supplier financing can free up capital when starting a new business. Suppliers can extend payment terms anywhere from 60 to 120 days. At the end of the term, of course, the cost of the supplies must be paid. While supplier financing is not a long-term solution to small business finances, it can help businesses survive during lean times.