<br/> <br/> Unlike what most small business owners believe, funding a business is not brain surgery. Really, there are only three main methods to do it: via debt, equity or http://www.accountsreceivablefinance.org what I call "do it yourself" funding.<br/><br/> Each and every technique has benefits and drawbacks you should know of. At various stages in your business's life cycle, one or more of these methods may be appropriate. That is why, a complete understanding of each method is crucial if you think you may ever have to obtain financing for your business.<br/><br/><br/>Debt and Equity: Pros and Cons<br/><br/>Debt and equity are what lot of people think of when you ask them about business financing. Traditional debt financing is typically provided by banks, which loan money that must be repaid with interest within a certain amount of time. These loans generally must be secured by collateral just in case they can not be repaid.<br/><br/>The cost of debt is relatively low, particularly in today's low-interest-rate setting. However, business loans have become more challenging to come by in the current tight credit environment.<br/><br/>Equity financing is given by investors who receive shares of ownership in the company, as opposed to interest, in exchange for their money. These are typically venture capitalists, private equity firms and angel investors. Although equity financing does not have to be repaid like a bank loan does, the cost in the long run might be much more than debt.<br/>This is because each share of ownership you divest to an investor is an ownership share out of your pocket that has an unknown future value. Equity investors often place terms and conditions on financing that can chain owners, and they anticipate a very high rate of return on the companies they invest in.<br/>DIY Financing<br/><br/>My favorite kind of financing is the do-it-yourself, or DIY, variety. And one of the best ways to DIY is by utilizing a financing technique called factoring. With factoring products, companies sell their outstanding receivables to a commercial finance company (sometimes referred to as a "factor") at a discount. There are two key advantages of factoring:.<br/><br/> Significantly improved cash flow As opposed to standing by to get payment, the business gets the majority of the accounts receivable when the invoice is generated. This decrease in the receivables delay can mean the difference between success and failure for companies operating on long cash flow cycles.<br/><br/> Say goodbye credit analysis, risk or collections The finance company conducts credit checks on customers and scrutinizes credit reports to uncover bad risks and set appropriate credit limits essentially becoming the businesss full-time credit manager. It also performs all the services of a full-fledged accounts receivable (A/R) department, including folding, stuffing, mailing and documenting invoices and payments in an accounting system.<br/> Invoice Factoring is not as widely known as debt and equity, but it's often more helpful as a business funding tool. One explanation many owners don't consider invoice factoring first is because it takes a while and energy to make factoring work. Most people today are seeking out instant answers and immediate results, but stopgaps are not always obtainable or advisable.<br/>Making It Work.<br/><br/>For invoice factoring to function, the business must accomplish one critical thing: supply a quality product or service to a creditworthy customer. Naturally, this is something the business was created to do in the first place, but it acts as a built-in incentive so the business owner does not forget what he or she should be doing anyway.<br/><br/>Once the customer is satisfied, the business will be paid immediately by the factor it doesn't need to wait 30, 60 or 90 days or longer to receive payment. The business can then without delay pay its suppliers and reinvest the profits back into the company. It can employ these profits to pay any past-due items, obtain discounts from suppliers or increase sales. These benefits will often more than offset the fees paid to the factoring company.<br/><br/>By receivable factoring, a business can increase its sales, build strong supplier relationships and enhance its financial statements. And by relying upon the invoice factoring company's A/R management products, the business owner can focus on expanding sales and increasing profitability. All of this can come about without increasing debt or diluting equity.<br/>The average business uses factoring companies for about 18 months, which is the time it usually requires to attain growth objectives, pay off past-due amounts and boost the balance sheet. Then the business will likely be in a better position to look for debt and equity opportunities if it still needs to.