We can have all the preliminary data on paper: products or services, production costs, operating costs, distribution, personnel, and so on. But, then how will we pay for this whole project? it is there where we will need to know the different ways to finance a business. Starting from the above; We do not necessarily have to be in the initial phase of a project to need financing.

Such is the fact that, for the most part, it is duly established companies that require this financing in order to continue operating and obtain more profitability. This situation seems to be multiplying today, where there is a state of financial stress worldwide, which forces SMEs to have financing availability plans (either short or long term), as a way to ensure a source of capital. feasible to keep their operations active, once they have incurred in investments concerning their reserve fund.

That is why below, we will indicate what are the various types of business financing that you can choose as entrepreneurs or owners of SMEs, so that in this way you can choose the option that is closest to the characteristics that your business deserves, thus achieving a total balance with its financial viability plan.

What is business financing?

Financing is monetary resources, which are used to carry out economic activities. These have as their main characteristic the complementation that is carried out between own resources, with those obtained through loans. Financing can be arranged nationally and internationally, with a variety of resources such as credits, guarantees, issuance of titles, promissory notes, among others.

As we mentioned at the beginning of the post, every financial institution needs excellent financial management, with which it can optimize the planning of the company’s economic resources; Otherwise, it will be unable to face the economic responsibilities that arise both in the present and in the future. The commitments that may arise from the different financial activities can allow a company to increase its profitability while reducing its risks; all this as a result of a correct management of its resources.

Financing can be resources with distinctive characteristics, which is why they can be classified according to their duration, origin or diversity. Let’s know what these types are:

Types of business financing

  1. Internal financing: It comes from the company’s own resources, such as: contributions from owners or partners, passive capital reserve or retention of profits.
  2. External financing: They are used when the company is unable to operate with its own resources and has already used internal financing. Moreover, these are the focus of our article.

Financing according to its duration

  1. Short-term: These are obligations that have a maturity period of less than 1 year. They are used to support the assets of a company, such as: inventories, accounts receivable, cash or marketable securities.
  2. Long-term: These are obligations that have maturity periods greater than one year and can be used for large expansion projects.

10 sources of financing for SMEs

There are many types of business financing; from the most classic to the new methods. That is why, as a financial advisor to each company, it is vital that before requesting financing, you take the trouble to study the different sources of financing, since they all have special characteristics for each situation. Existing financing, since they all have special characteristics for each situation. .

1) Loan

The loan is the most common financing method that exists for companies. This is requested in financial entities, stipulating the amount of capital that the company requires to meet the needs it has and then, it is returned through monthly installments with the interest percentage agreed upon at the time of contracting. Thanks to the fact that loans are generally requested to finance large expansion projects, real estate acquisitions, brand growth or start-ups; they are usually for large and long-term capital amounts.

2) Credit Policy

A credit policy, known daily as “credit”; It is the action with which a banking entity places at our disposal a previously requested amount of capital, so that we can make use of it whenever it is required. This system is developed in a similar way to credit cards, where there is a previously established amount that we can use whenever we need it; to then pay drafts until we have canceled the amount used, with the interest percentage handled by the institution (this is usually 4% but it depends on the conditions of each bank identity and the stipulated term).

This source of financing is usually requested for short periods of time, in which large capital is not required. For example, to hire staff or equipment; with which the credit can be reintegrated once charged for the work.

3) Microcredit

These are personal loans that are mostly used to finance social and ecological projects, although they are also used for companies. In general, social microcredits do not require letters of endorsement and are usually approved for small amounts of money that do not exceed $20,000 USD. For the most part, the beneficiaries of this type of financing tend to be freelancerswomen entrepreneurs, young people or immigrants.

4) Commercial Credit

Also known as “commercial discounts”, they are the deferrals that companies grant to their clients at the time of carrying out a commercial transaction, which may be a sale of goods or services. An example of this would be, agreeing to pay within 2 months so that in this way there is time to sell the goods or services purchased from the supplier.

5) Factoring

Invoices pending collection are a transfer operation of the rights to collect, inherent to a company in exchange for interest. In order to carry it out, it is essential that the debtor company has a high degree of solvency; Otherwise, if it did not pay, they could not issue a claim to our company, but to those who have assigned the invoices. This action is generally carried out to financial entities.

6) Renting and Leasing

Undoubtedly, this is one of the new forms of financing that are currently standing out, especially for entrepreneurs who do not yet have a large financial capital. Both practices aim at long-term leasing of vehicles, infrastructure or electronic equipment, to name a few. Although both are based on the rental of a property, they are not exactly the same. The leasing offers an option mostly inclined to rent itself, in which the lessee only pays for the use of the property.

Additionally, it confers the purchase option, so it is mostly aimed at a final purchase.

For his part, the leasing It consists of the purchase of a property by a company, with the aim of renting said property to a specific client. The main advantage of this practice is that it generally includes equipment maintenance in its costs; so not only will we have the use of the properties, but we would also obtain significant savings.

7) Business Angels

It is closely related to the Investor Entrepreneur and the Risk Investors. In general, they are people who have significant capital and who invest in companies that are in their early stages; performing this action in exchange for a percentage of the shares. Generally, Business Angels they want to see their investment return in a few years and will actively participate in the company; either advising or taking command control of the business. In the event that a company has several Business Angelsonly one will assume the role of secondary leader, while the others only provide capital (although they remain alert at all times of what happens within the business management).

8) Crowdlending

Without a doubt, this is the newest option among those that make up this list. It consists of obtaining loans through companies on-line. How is this done? Connecting SMEs that need financing with investors that can provide it. They usually handle interest of 5% and do not generate costs for early cancellation; Additionally, it should be noted that it is carried out between individuals.

9) Crowdfunding

The innovative source of financing that has stood out the most in recent years. The crowdfundingconsists of crowdfunding on-line, generated from economic donations. Although most participate altruistically, many others make donations in exchange for bonuses.

To be attractive in the eyes of donors: projects must be interesting, they must be handled with care, and rewards must be offered as an additional incentive (for example, if the company will make a product, offer it).

10) Family and Friends

Depending on how old your company is, this resource may have one name or another. It is generally known as “the 3 efes”: Friends, family and fools. Since, the first people to support us financially are usually our families, friends or fools. That is why it can also be called as “the first resource”. Although if our enterprise is properly founded, the last thing we want is to abuse our loved ones, so we will call it “the last resort”. Although it is another source of financing, it should be used at your discretion.

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