As the old saying goes, “Cash is King.” But the question is, when and how does an established business go about obtaining financing? Financing is the process of acquiring funds for business operation activities. These activities can include making purchases, investing, hiring employees, improving infrastructure, and more. It is important for businesses to understand this process as the correct utilization of the financing system will allow companies to purchase products today that they otherwise would not have been able to afford until a much later date. This allows for companies to leverage money today that they expect to earn tomorrow. All of this sounds great, but the question remains on how and when to finance?
How you finance is determined by several factors, as there are a number of different ways startups can finance.
This refers to investing your own money into the company. Self-financing is an important first step in financing a business, as most other financing options will ask how much of your own money you have invested. They need to know that you believe in your idea enough to risk your own money.
Asking for money from those that are close to you is a great source of financing. They are likely wanting to see you succeed and will provide you with a small amount of capital funding.
Bank loans can be short term or long term, depending on the purpose of the loan. Bank loans are frequently used to finance start-up capital and also for larger, long-term purchases.
Lines of credit
A line of credit (LOC ) is preset borrowing limit that can be used at any time. The borrower can take money out as needed until the limit is reached, and as money is repaid, it can be borrowed again in the case of an open line of credit.
Equipment financing lets you finance up to 100% of the cost of new or used equipment for your business, such as ovens for a restaurant, machinery or company cars.
Invoice/Purchase order financing
Businesses should apply for purchase order financing to purchase the supplies they need to start a job or deliver a product. Invoice financing allows businesses to get capital in exchange for a missing or delayed invoice payment after a job is completed.
This is a loan that a bank will provide based off the guarantee of your personal assets, such as home equity, savings accounts, and other additional assets.
7(a): A 7(a) loan-guarantee is provided to lenders to make them more willing to lend money to small businesses with weaknesses in their loan applications.
504: The US Small Business Administration 504 Loan or Certified Development Company program is designed to provide financing for the purchase of fixed assets, which usually means real estate, buildings and machinery, at below market rates.
These are small loans that are made to businesses or individuals that require immediate capital. These loans tend to have very short term repayment plans, up to one year. These are slightly different than short term loans in that they are given in very small increments with higher interest rates, typically as unsecured loans.
Short term loans
For a quick and fairly small cash infusion that you'll pay back in a year or less, you're most likely to hear about payday loans or short-term loans from a bank, credit union or online lender. These loans are secured and have a lower interest rate than microloans, generally.
Business Credit Cards
A great way to help generate cash flow, business credit cards help spread out the payment terms of purchases such as inventory. They also are a great way to keep things separate from other financials, as well as documented in one place for accounting purposes. The danger is that they have high interest rates, so be careful in utilizing credit cards.
Still have questions? The Illinois Small Business Development can help with any financing questions. If you have already attended our Starting a Business in Illinois Workshop, your next step is to meet with an adviser.