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Business has such a versatile scope, any thing considered in the point of view of earning money can bring a new idea for a business. Specially for a small business one does not need to go very formal strategic planning but the crucial part is financing. Before starting business one should be aware of financing options and their comparative merits and demerits. There are mainly eight types of financing options for small firms. They are listed below with their advantages and disadvantages:

(1) FAMILY LOANS: As its name suggests it is borrowing from family member.
Advantages:
1) No security is required.
2) Profit is distributed among the family members so it stays at home.
Disadvantages:
1) Since there is no security required so it can strain the family relationship if repayment is not made as expected.
2) If business fails, entire family suffers.
3) Family members? unwanted interference is unavoidable.

(2) BANK OVERDRAFT: This is a kind of bank loan. Many credit cards provide this option.
Advantages:
1) Its flexibility is specialty of such financing. Once agreed, it can be availed on demand.
2) Interest is payable when the borrower uses it so it saves cost.
Disadvantages:
1) It is repayable on demand. Terms are not fixed.
2) It needs security against business assets.
3) It requires sufficient security, due to lack of which, it can?t be granted.
4) Rate of interest is usually higher than loans.

(3) BANK LOANS: Banks gives loan for business but one has to convince the bank authority about feasibility of business plan. There are various mortgages available to chose. A good research on rates and terms of banks loans should be done before making any decision.
Advantages:
1) Terms of loan is fixed i.e. it is not repayable on demand.
2) Interest and capital repayment are fixed and known in advance so it helps borrower to plan the amount and terms for borrowing.
3) Rate of interest is usually lower than Bank Over- Drafts.
Disadvantages:
1) It needs security against business or personal assets.
2) Sufficient security is needed otherwise can be refused.
3) Require good cash flow for repayment.

(4) FACTORING & INVOICE DISCOUNTING: This is a way of selling accounts receivables to third party so infact it doesn't bring new money but it encashes the pending money.
Advantages:
1) Security is on debts generated by sales so increase in sales increases finance availability.
2) Interest and charges are deducted from the profit of the firm so no chances of missing repayment.
Disadvantages:
1) Rate of interest is usually higher than that of bank loans.
2) Certain conditions are imposed including checks on new customers.

(5) LEASE & HIRE-PURCHASE:Opting for this option means buying fixed assets instead of getting cash in hand.
Advantage:
1) Security is on assets purchased so no extra security is needed.
Disadvantages:
1) Rate of interest is higher than Bank Loans.
2) Adequate Cash-flow is required to meet regular repayment.

Learn more about this author, Lucy G.
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