What Are the Three Main Ways to Categorize Business Financing?

Maybe you are just getting your business off the ground, or you are trying to boost the bottom line of an already-established company. You reinvest your earnings and dip into your personal funds to supplement sales, but sometimes that is not enough. 

You need additional income for your operations, and you are not alone. According to a Federal Reserve small business survey, around 10-15% of U.S. firms seek external financing in any given year. But what type of funding should you pursue?

There are three main ways to categorize business financing that you may want to consider. Each has its own benefits and drawbacks — equity capital, debt capital, and specialty capital. 

Equity Capital Investors

When you trade away a piece of ownership in your organization in exchange for cash, you acquire equity capital. You are essentially selling a portion of your business.

Equity capital financing can come from:

• An angel investor — A person who invests his or her own money in exchange for equity in the company. Funding is usually fast, and the terms are straightforward.

• Venture capitalists — A group of people who pool their money and then split the equity stake. These tend to be large and complex deals that take longer to fund.
• Shareholders — These individuals invest relatively small amounts of money for shares of stock, each of which is a fraction of the company’s equity. They get to vote on certain financial decisions and sometimes receive a return in the form of dividends.

Equity Financing Advantages

Businesses that seek equity capital often do so because:

• The money does not have to be paid back unless you buy back the equity.
• You do not pay interest on the funds.
• You only incur a financial cost for the capital if your company grows in value, making the equity worth more. For this reason, there are fewer risks to you as the business owner.

Equity Financing Disadvantages

There are also disadvantages to using this method for business funding:

• You may have to pay dividends and provide regular financial reports to your investors.
• You will not have sole discretion on how to run your company. Equity investors function as business partners, so many of your decisions will have to go to them for approval. 
• If you sell more than 50% of your company’s equity, you will lose control of the business, and your investors could legally take over operations.

Debt Capital Loans

Business credit cards, loans, and lines of credit are categorized as debt capital. You borrow the cash and repay it according to the pre-established terms of the loan. Once debts are paid back, you have no further obligation to the lender. 

Debt capital is the most common type of business financing. It is also the most easily recognizable to business owners since many have had similar products like car loans, consumer credit cards, or home mortgages before becoming entrepreneurs. 

Debt Funding Advantages

What makes debt capital so appealing?

• There are many lenders out there competing to lend money to small businesses, so the funds can be relatively easy to access.
• The terms are usually straightforward, so you know ahead of time how much it will cost you to use the funds and how much your payments will be.
• You do not have to give up any equity or control of your business.

Debt Funding Disadvantages

On the flip side, revenue from debt capital can be costly:

• High-interest rates can eat into your profits. The longer you take to pay the money back, the more it will cost you.
• It can be time-consuming to fill out the application, gather documents, and wait for underwriters to approve your loan. For example, even emergency Small Business Administration (SBA)-backed loans take at least 10-21 days from start to finish, and with standard SBA loans, it will be 60-90 days before you see the funds.
• If your credit history is spotty or thin, you may not qualify for a traditional bank loan.

Specialty Capital

Another business financing option is specialty capital, which is acquired by controlling funds or inventory without paying for them. Examples include:

• Grants — These are funds that do not need to be paid back.
• Negative cash conversion — Customers pay you first, and then you buy the merchandise from your supplier.
• Vendor financing — You acquire inventory on credit, and then you pay your supplier once you make a sale.

Specialty Funding Advantages

This method of business financing is desirable because:

• It costs you nothing.
• Your working capital is not tied up in inventory.
• It frees your firm from obligations that can limit growth.

Specialty Funding Disadvantages

There are reasons more businesses don’t use specialty financing:

• Although fairly common in the insurance industry, it is not readily available in other sectors.
• It takes a lot of time and persistence to get an arrangement set up with your suppliers.
• Grants involve a lot of paperwork and are incredibly competitive.

What Types of Funds Are Best for Your Business?

The funding option you choose to improve your operation’s cash flows will depend on:

• Whether you are willing to share control of your business with others. 
• Your credit history.
• How much sweat equity you’re willing to expend to pursue specialty financing.

Choose the Revenued Business Card to Help You Reach Your Goals

If none of the traditional funding types listed above is a suitable fit for your firm, consider a new funding opportunity like the Revenued Business Card to help cover your expenses and meet your financial goals. 

You retain control of your company and your business can qualify with subprime credit. We’ve made the application process fast and easy. Find out more by applying online or calling us at +1-877-662-3489.