by Costas Chryanthou

Created on: April 11, 2008   Last Updated: April 11, 2009

Ways in which to finance a small business. Usually a new start up business will consist of a one man band, that takes to setting up a new business either on their own, in a partnership agreement with a friend or family member(s). So the new owner has a choice of using debt/ own equity finance, along with third party assistance. Stock market listing might not be available for firms that have an unproven track record. So in terms of external equity finance a small start up business will find it difficult to raise funds from stockholder investors.

Usually speaking before debt finance is obtained a new business owner will have to invest his or her own cash in the business before the banks will take that person seriously.

Banks will tend to finance potentially profitable small business enterprises that can afford the repayments on a number of debt products. It may be the owner needs a business credit card to purchase the supplies. The tax relief on the bank loan can be claimed thus a 10% loan rate is 7% after the tax relief.

The company should try and take advantage of trade credit and delay creditors for as long as possible. The longer the time taken to pay the trade creditors for raw materials are in effect interest saved over a year. In terms of financing this point holds well. Though trade creditors will start getting anxious regarding slow payers.

Use of a factoring company, this is a useful form of finance in that the factoring company lends the company money based on the account receivables of that business. This helps the company have source of finance to manage the business, whilst the factoring company are in charge of collecting money from credit customers.

Leasing equipment also has its advantages over buying equipment outright in one payment. The costs of the leasing agreement are spread out or paid up in one payment though the cost of the leased equipment is much less than buying a brand new machine. Leasing is a form of finance in that it avoids the need for debt or spending a vast amount of cash at the bank in order to have a business asset.

Venture capital financing involves a new start up going to venture capital firms who might be interested in buying a share of the company. Though venture capitalists only tend to be investors in projects that are likely to double and treble profits year upon year. A new owner might not want to lose control at the same time of their new business, though it still remains an avenue worth considering.

Use of grants that may be available from regional, national governments might also be willing to invest in small new start up firms. Short terms loans, overdrafts are other areas of business finance worth considering. If the property of the business is freehold, the owner might want to do a sale and leaseback of the premises to help finance the initial growth stages of the company. This will raise funds internally via the sale of land and freehold securities.

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