How do small businesses obtain financing?

You can obtain business financing by taking on debts, such as small business loans from traditional banks and alternative online lenders, or by offering capital to investors. Credit cards are often the easiest option for obtaining money, but they have a high cost to capital, since interest rates on credit cards tend to be high. The good news is that they're flexible, says Rachel Alexander, a small business consultant. You don't have to justify what you're going to spend the money on.

The amount you can get is based on your credit limit, which is likely lower than what you would get from a bank or other type of loan. Credit cards are a good source of capital for small-scale renewable needs and for entrepreneurs who want to retain ownership and control of the company. Online crowdfunding sites have become popular in recent years. They are usually used to help companies raise money to launch a specific product.

Crowdfunding can be time consuming and requires putting information on the site, often with a video or photos of the product. Angel investors are people with high net worth who get a share in the capital in exchange for their funding. They expect to make a profit and usually have business experience that they share with you to help your business grow. Know that angel investors can analyze your business plan and you'll have to argue why they should invest, which isn't a bad thing, Alexander says.

The process of selecting entrepreneurs must ensure that the business plan is sound. Like angel investors, venture capitalists take capital from their business in exchange for funding. Venture capital funds are similar to mutual funds because they pool the money of many investors. Venture capitalists also have business experience in the areas in which they invest and will be involved in managing the business.

In exchange for potentially large amounts of money, you'll give up some control and capital. Factoring is a type of financing that helps small businesses that have trouble working with customers who pay bills within 30 to 60 days. Most business owners use their personal credit cards at one time or another to finance their business. This benefit makes microloans an excellent alternative for business owners who need financial and business help to grow their businesses.

We suggest that you consult a personal finance expert and a business finance expert if you decide to use this option. An advantage of factoring is that the financial company depends on the credit of its invoices, rather than on the credit of the business owner. You'll also need to know how you'll return it and why your business represents a good risk for investors. And once your company has grown, you'll be able to take advantage of that growth and get conventional funding on more attractive terms.

You may have a good idea, but investors will want to learn about the company's management so they can trust the business plan and the people behind it. Small businesses rarely have the assets, track record, or management experience to qualify for conventional funding. This advantage makes factoring a great option for small business owners who have little or no personal credit. Peer-to-peer lending has gained popularity in recent years as a way to finance small businesses.

Before seeking funds, you must have a solid business plan and a clear outline of how you plan to use the money.