Where Growing Businesses Get Their Financing, and How it Affects Them

Owning a business is a serious undertaking that requires time, effort, and most importantly, capital. Every business needs some form of capital to keep things running smoothly. Whether it's being used to pay employees, purchasing advertising space, or buy raw materials, some funding is needed along the way. Depending on the maturity and industry of the business, different financing options will be more fitting to support continued growth. Today, we are going to talk about 3 ways that businesses are financed and the benefits and drawbacks of each.

Owner Financing

If you are just starting your own business, this is likely the only source of financing you will have available. Many small business owners will start by saving their own money first and putting themselves in a position to take a risk with that money, hoping it’s enough to get the business off the ground and generating its own cash flow before the initial investment runs out. As the business grows, the owner could inject more money into the business through contributions or provide the business with a loan to keep it running in times of hardship. 

Pros - No one else can tell you how to use the money and run your business. There is no interest needed to be paid, or financial covenants to comply with.

Cons - This requires the owners to have the capital on hand to support the business, which is common for very young businesses, but can be more difficult once the business is up and running and is no longer a “side project” for the owner

Banks

Reaching out to a bank is a great way to take the next step in the business lifecycle. Banks have many different loan products that can be specialized to suit the needs of growing businesses at many stages because after all, they are in the business of loaning money. Some businesses even have multiple loans with a single bank to serve different areas of the business, such as a line of credit for operations and a term loan for a long-term project. 

Pros - Banks are the simplest way to gain access to a lot of money quickly. There is no need to work on the side to save up money over time or convince a group of investors of why they should buy into your company. 

Cons - Banks will charge interest on loans, and some loans have additional requirements such as regular check-ins with the bank, or financial statement audits. 

Investors

Bringing in an investor can be the best or the worst decision a business can make, depending on if the investor is the right fit. The process of getting people interested in investing in your business can be a job by itself and selecting the right investor can be even tougher. While getting money injected into the business is exciting, giving out too much of the business too quickly can lead to unsatisfying results. It’s important to remember that investors aren’t only good for their money, they can also provide valuable support, insights, and professional networks to help the business grow in ways that no one else could. 

Pros - Opens exciting opportunities with potential business partners who have a vested interest in the success of the business. Accessing these opportunities can be the main reason why a business goes from good to global.

Cons - Giving up ownership can be a turnoff for some owners. Having another party to answer to can be difficult for the type of person who started their own business. Investors may also require the use of certain vendors or relationships and can also require financial statement audits to ensure their investment is on the right track financially. 

Large businesses will likely have had all 3 types of financing listed above at some point in their lifecycle. A simplified story would be: A business owner starts with an idea and some money and grows a business until the bank will give them a loan which will help the business grow even further until it is ready to go public. If you are interested in running a business, consider these financing options and which one would make sense for your business model. It’s important to plan ahead and educate yourself on your potential options so you can make the right decisions when the time comes.