Types of Business Funding

Funding plays a crucial role in business success.

Business funding has become an extremely important issue, and even more so for start-ups and small businesses. When a business receives funding from the wrong source, it can often result in several undesirable consequences such as s loss of control of the business, quarrels resulting from misunderstanding with the financiers and time wasted trying to look for alternatives. You have several options for funding your business.

Grants

Those in science and technology can acquire grants from the government through the United States Small business Administration's Small Business Innovation Research (SBIR) program. Those who chose to work with a government agency in a Coorperative Research and Development Agreement (CRADA) carry out cost-effective research and increase their resources. Apart from these funds, numerous regional, minority and state grant opportunities exist. The benefits of this type of business funding include the lack of financial obligation and the endorsement that grants bestow on a project. On the other hand, this type of funding comes with a great deal of competition, and the organization providing the grant can impose extremely strict qualification guidelines.

Debt Financing

Financial institutions can fund a business. bank image by Pefkos from Fotolia.com

Debt financing is the most familiar type of business funding. Many small start-ups receive funding from financial institutions through a line of credit or a loan, which they must repay as stipulated in the agreement and with the applicable interest rate. Banks decide those who qualify for loans by assessing their collateral, cash flow and asset liquidity together with the required well-thought out, credible business plan. The benefits of this type of business funding lie in their accessibility to those companies that cannot get equity funding, as well as the fact the business does not have to relinquish equity. The disadvantages center on the required collateral and the fact that the business must pay any accruing interest.

Equity Financing

Private investors finance many businesses every year in exchange for equity in these businesses. These private investors can be family and friends, high-net-worth investors referred to as "angel investors," or even "venture capitalists," (professional investors). This type of business funding is not on the same level with other sources of funding because it usually comes in small amounts. The advantages of this type of business funding lie in the convenience and ease with which business can obtain them, the relatively low occurrance of legal hassles and the quick availability of funds. This type of funding can lead to a lot of bad blood if the investment goes awry, however---typically a one-time-only type of funding.

References

• More Business: Business Financing Options: Different Types of Business Loans
• Microsoft: 3 Best Types of Funding for Your Biz