How to Finance a Business

When you are looking into starting a business you will also need to consider how to finance a business. You will find several different methods available, but you may not qualify for all of them. Your success with any method will still depend on the credit rating that you have when you seek out financing.

Establish a Separate Business Credit Identity

The kind of credit you want is business credit. This means you have to separate yourself from your business legally, by incorporating your business as a separate legal entity. You’ll need a separate business bank account, separate business licenses and registered office etc. Once these are in place, get registered with the main credit rating agencies: Dun & Bradstreet, Experian and Business Credit USA. This all works in your favour to establish your business credit.

You won’t have much of a credit rating until you’ve been in business and have some sort of trading record established though.

How to Finance a Business - Your Options

Equity Financing

Equity financing is where investors (including you) give you the capital you need, but in return you give them part of you company.

Don’t overlook family and friends! Depending upon the amount of investment, equity investors may want a seat on your board and a say in the way the business is run, after all it’s their business too now. The plus side is that they may also have necessary networking and business contacts plus relevant experience to bring to bear on the business.

Debt Financing

Debt financing is when you agree to pay back the capital you borrowed with interest at a rate established. This is most commonly transacted with banks as a term loan or secured loan. The interest rate will be set at a level that is dependent upon the perceived risk of your enterprise, the business credit rating, and the business sector it operates in.

Private Lenders

Private lenders will give you a business loan. Often these schemes are wrapped around government initiatives. Equally private lenders may also include family and friends or other business acquaintances. Don’t overlook suppliers, they have a vested interest in your ongoing success.

Government Loans

Most government schemes act in tandem with banks. Normally, banks will not take the credit risk with small recently established businesses. In return for some form of underwriting guarantee from the government organisation, the bank will advance you the money, and this will be operated on normal commercial terms. You may also have other conditions that the government require to be met. For example they will only advance up to a maximum of 50% of the required capital.

Last and Least

No commercial lender worth his/her salt is going to give you capital without security and you may be required to offer a second charge or second mortgage on your home. It’s asking a lot from you and your family to put your home at risk, but business history is scattered with renowned business leaders who risked it all and won. In most cases this has to be the very last option when considering how to finance a business.

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More about How to Finance Your Business:

Small Business Financing

Using a Small Business Franchise to leverage your capital.

Sorting out your Working Capital Financing

Small Business Loans - maximize your application chances.

Small Business Finance Tips Home Page.