what are the Different Methods for Funding a Business?

Dan Cavallari

Methods for funding a business may vary depending on the size of the business and the financial status of the business owner. Applying for business loans is one way to procure money; a potential business owner can visit banks and credit unions to secure loan money that must be repaid with interest. Government loans are also available for funding a business, depending on what country the business owner plans on operating in. These loans are usually low-interest, but they must also be repaid. Business owners may also seek investors to help in funding a business; these investors will post a certain amount of money with a promise of a return after a certain date or time period.

Businesswoman talking on a mobile phone
Businesswoman talking on a mobile phone

Larger start-up businesses, particularly those in technology-related fields, may secure venture capital from a wealthy individual or company. This money is provided to help research the business model and execute the business plan. Venture capitalists may engage in funding a business by providing money up front and charging management fees, or they may charge an interest rate on money over time. Other arrangements can be made as well; contracts will be written between the venture capitalist and the business start-up to ensure the venture capitalist receives compensation.

Small business loans are perhaps the most commonly used methods for funding a business. An individual or group of individuals can apply for a business loan from a bank or credit union, but the bank or credit union is not obligated to loan the money. They will make the decision based on the bank's faith in the business as well as the potential business owner's equity, or how much money or assets the business owner has to invest in the business himself. The banks essentially want to know that the money will be paid back to them with interest in a timely manner. Business loans have become more difficult to acquire in many parts of the world.

In the United States, a government agency known as the Small Business Association (SBA) can help a potential owner with funding a business. This agency does not directly loan money to business owners, but the agency can help the potential owner take steps toward securing business loans through banks by educating the owner about financing options and business execution. The SBA may also act as the guarantor on the the potential owner's loan. A guarantor is a person or entity who agrees to assume the business owner's debt should he default on the loan and fail to repay the money as agreed.

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