Want to expand your business? Growth depends on selecting the best sources of capital for your company. Since all sources of capital are not alike, how you choose to secure funding will help determine your company’s cash flow, risk, valuation, acquisitions, and future financing.
Starting and growing a business requires capital – the money needed to get operations off the ground and expand. For many entrepreneurs and business owners, figuring out where to find that crucial capital can be a major challenge. Thankfully, there are a range of options when it comes to financing a business. Here, we’ll provide a complete overview of the 5 most common sources of capital for businesses.
1. Personal Savings
Using your own personal savings to fund a business is the most common source of startup capital A massive 835% of new businesses rely on the founders’ personal savings.
The advantages of using personal savings are clear – you can get your business going without taking on outside debt or giving up equity. However, most people don’t have enormous savings to tap into. Minority communities in particular often lack large pools of personal savings to leverage.
While personal savings are limited for many, they should be the first place entrepreneurs look when trying to finance a new venture Even small amounts of savings can go towards those critical early expenses like registering a business, building a website, or buying initial inventory.
2. Loans from Banks and Financial Institutions
After personal savings, loans from banks and financial institutions are the next most popular source of capital. Around 21.5% of businesses use loans to finance their operations and growth.
Compared to personal savings or credit cards, business loans offer access to more substantial amounts of capital. Banks and institutions will look closely at your credit rating, existing assets, business plan, and ability to repay when deciding whether to approve a loan.
The loan application process can be lengthy, but once approved, bank financing gives you flexibility in using the capital for a variety of business needs. Just be aware that you’ll need to make regular principal and interest repayments.
3. Funding from Friends and Family
Don’t underestimate the power of your personal network! 11.2% of businesses tap friends and family to help get up and running. Those close to you may offer funding in the form of gifts loans, or even equity investment.
Friends and family members already know and trust you. Convincing them to invest in your business can be easier than pitching outsiders. Just be sure to be transparent about risks and put any agreements in writing. You don’t want to jeopardize important relationships.
4. Business Credit Cards
Credit cards offer a financing option for 7.3% of startup businesses. The advantage of credit cards is flexibility – you can use the credit line for any business expense without a formal application process.
However, credit cards come with much higher interest rates compared to traditional business loans. It’s critical to pay off balances each month to avoid accruing major interest fees that can harm cash flow.
5. Equity Investment
Equity financing involves selling partial ownership shares in your business in exchange for capital. While less common for early-stage ventures, equity is a key source of growth funding.
Angel investors and venture capital firms are the most likely providers of equity financing. These individual and institutional investors offer larger amounts of capital but expect a portion of ownership and sometimes a say in running your company.
Equity financing is best suited for already established, rapidly growing businesses in need of expansion capital. The tradeoff for giving up some control of your company is accessing larger pools of investment.
Other Notable Sources of Capital
Beyond the top 5, there are other sources entrepreneurs can look into when seeking funding:
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Crowdfunding: Raising small individual investments from a large pool of people, often online.
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Business Credit Lines: Revolving credit accounts with banks that provide flexible access to funds.
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Government Grants and Loans: Funding programs targeted at certain industries, business types, and owner demographics.
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Vendor Financing: Payment plans or loans provided by suppliers and vendors.
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Customer Financing: Similar to vendor financing but offered by business customers.
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Peer-to-Peer Lending: Borrowing from non-institutional lenders through online platforms.
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Purchase Order Financing: Using outstanding purchase orders as collateral to obtain financing.
Choosing the Right Financing Mix
Every business has unique funding needs and constraints. As an entrepreneur, it’s critical to understand your options, weigh the pros and cons of each, and choose the appropriate sources and mix of capital for your situation.
Personal savings and credit are often best for starting out. As you look to expand, low interest loans and equity financing will provide more capital. Government programs may offer advantages if you qualify.
The bottom line is that with the range of financing alternatives available today, capital should not be the factor that holds your business back. Do your research, choose wisely, and secure the funding you need to turn your vision into reality.
Personal loans and alternative capital sources
There may come a time when you look to personal savings, family and friends, or angel investorsDisclosure 2 as potential sources of capital. While they might offer more favorable terms than professional sources, these transactions can offer a different set of challenges by mixing business and personal relationships. Traditional crowdsourcing, such as a Kickstarter campaign, is another option, but be sure to research the regulations and understand how it may limit other fundraising methods.
Vendor credit is a small line of credit that allows you to buy goods or services now and pay for them at a later date (typically within 30, 60, or 90 days). It can also be a form of credit that your vendors give as payment for an amount they owe to your business. Working with your suppliers to obtain favorable payment terms, discounts, and financing provides a quick way to access inexpensive working capital, but its use can be limited by the scale of your supplier’s credit and usual terms of the industry.
Selling your receivables to a commercial finance company at a discount can provide your company with cash and reduce your collection risk. Receivables factoringDisclosure 3 can be expensive compared to other forms of capital and is typically only practical for businesses with creditworthy customers.
Small Business Administration (SBA) loans
If you’re expanding and need more flexibility than conventional financing provides, your small business may qualify for one of three different types of SBA loans. These government-backed loans are offered through the SBA and distributed by banks, with the SBA assuming most of the risk. Compared to conventional loans, SBA loans offer competitive terms, counseling and education, and other unique benefits. They also offer freedom in how you choose to use funding, such as acquiring real estate, funding innovation, or buying out a retiring partner. SBA loans require thorough documentation, so you’ll want to speak with an experienced banker—like your Truist relationship manager—who can help you with your application.
5. Sources of capital for business owners
FAQ
What are the 5 types of capital?
The concept of capital has a number of different meanings. It is useful to differentiate between five kinds of capital: financial, natural, produced, human, and social. All are stocks that have the capacity to produce flows of economically desirable outputs.
What are the sources of capital?
The three main sources of capital for a business are equity capital, debt capital, and retained earnings.
What are the five factors of capital?
Some main factors include the firm’s cost of capital, nature, size, capital markets condition, debt-to-equity ratio, and ownership. However, these factors might help to choose an appropriate capital structure for a business, but checking all the side factors can help adopt more appropriate and accurate adaption.
What are the main capital resources?
- Manufacturing equipment. Manufacturing companies make use of specialized equipment to transform raw materials into components and final products. …
- Tools. …
- Property. …
- Company vehicles. …
- Computer software. …
- Office supplies. …
- Proprietary work processes.
What are the three main sources of capital for a business?
The three main sources of capital for a business are equity capital, debt capital, and retained earnings. Equity capital is where a company raises money by selling off a percentage of the business in the form of shares which are purchased and owned by shareholders. What are the three major sources of corporate financing?
What are the 4 sources of capital?
She suggests that there are in fact four sources of capital: equity, debt, grants, and sales/revenue. Equity comes in three types for funding operations: public equity, external private equity, and internal equity. The main sources of funding, according to the passage, are retained earnings, debt capital, and equity capital.
What are the best sources of capital for a company?
Some of the best places to look for funding are retained earnings, debt capital, and equity capital. In this article, we examine each of these sources of capital and what they mean for corporations. Companies often need to raise capital in order to invest in new projects and grow.
What are the three major sources of corporate financing?
The three major sources of corporate financing are retained earnings, debt capital, and equity capital. Retained earnings refer to any net income remaining after a company pays off any expenses and obligations. Debt capital is funding that a company raises by borrowing money from lenders through loans or corporate bond offerings.
What are the most common sources of startup capital?
According to a 2018 survey by the Census Bureau, the most common sources of business startup capital fall into two main categories: equity and debt. Here are the five most common sources of capital for business startups: 1. Personal or Family Savings: This is the most popular source of startup capital, with 83. 5% of businesses relying on it.
What are the different sources of funding?
The different sources of funding include: The main sources of funding are retained earnings, debt capital, and equity capital. Companies use retained earnings from business operations to expand or distribute dividends to their shareholders. Businesses raise funds by borrowing debt privately from a bank or by going public (issuing debt securities).