Navigating Small Business Financing: Debt, Equity, and Hybrid Options
Running a small business often means you’ll likely need a little extra cash from time to time. Knowing how to get the right funding can make or break your business. Let’s look closer at three main types of funding: debt, equity, and hybrid financing.
Debt: Borrowing To Grow
Debt financing is when you borrow money and pay it back with interest. This includes bank loans, lines of credit, and Small Business Administration loans. The good thing about debt financing is that you keep ownership of your business. However, loan payments can be tough on cash flow, and lenders usually want collateral. This approach is best for businesses with steady revenue streams, which will ensure timely payments.
Equity: Trading Ownership For Capital
Equity financing means that you’ll be selling part of your business to investors for funding. Common sources are angel investors, venture capital firms, and crowdfunding platforms. Unlike debt, you don’t have to repay equity financing. However, this approach will require you to give up some ownership and possibly future profits. This financing approach tends to work best for start-ups or high-growth companies that aren’t yet able to qualify for traditional loans due to a lack of profitability or a solid credit history. It’s important to weigh the trade-off before taking the plunge.
Hybrid Financing: Combining Debt & Equity
Hybrid financing is a mix between the two previous types of financing – it mixes debt and equity elements. Examples include convertible notes and revenue-based financing. Oftentimes, these options are more flexible and align payment terms with business performance. This particular option is ideal for those seeking a more customized approach to financing. However, the terms of this approach often are complex and require careful negotiation.
Read Also: Ratio Analysis: Extracting Actionable Data From Your Financials
Financial Statements Matter
Accurate financial statements are crucial for securing funding. Lenders and investors will need a detailed financial package, including income statements, balance sheets, and cash flow statements.
Additionally, lenders or investors may ask for additional supporting reports, including accounts receivable, breakdowns or major expense categories, and information about owners and key employees. Together, these documents will paint a more accurate picture of your business’s financial health and operations.
How To Choose The Right Financing Option
Choosing the right financing option depends on your business model, growth stage, long-term goals, and risk tolerance. As your business evolves, you might use a mix of debt, equity, and hybrid financing to help fuel the business.
The best way to prepare for the day when you will explore these options is to get your financial records in order. This way, when the time comes to consider your financing options, you’re already sitting in a good place.
The corporate financing advisory services experts at GBQ Partners can help get your financial records in order while working with you to help identify your short and long-term financing options. Contact us to speak with a member of our team today.
Additional Resources
Matchmaker, Matchmaker: Choosing The Right Lender
Making Sense Of Your Statement Of Cash Flows
3 Financial Statements You Should Know