Unlike what most small business owners think, financing a business is not brain surgery. In point of fact, there are only three main ways to accomplish it: via debt, equity or what I call "do it yourself" funding.<br/><br/> Each and every technique comes with benefits and drawbacks you should understand. At various stages in your business's life cycle, one or more of these methods may be appropriate. For that reason, a thorough knowledge of each method is essential if you think you may ever have to secure financing for your business.<br/><br/><br/>Debt and Equity: Pros and Cons<br/><br/>Debt and equity are what most people think of when you ask them about business financing. Traditional debt financing is usually provided by banks, which loan money that must be repaid with interest within a certain period. These loans often must be secured by collateral just in case they can not be repaid.<br/><br/>The cost of debt is fairly low, particularly in today's low-interest-rate setting. However, business loans have become more difficult to come by in the current tight credit environment.<br/><br/>Equity financing is provided by investors who receive shares of ownership in the company, rather than interest, in exchange for their money. These are typically venture capitalists, private equity firms and angel investors. While equity financing does not need to be repaid like a bank loan does, the cost ultimately can possibly be much higher 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 handcuff owners, and they anticipate a very high rate of return on the companies they invest in.<br/>DIY Financing<br/><br/>My absolute 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 receivable factoring. With factoring programs, companies sell their outstanding receivables to a commercial finance company (sometimes referred to as a " factoring company") at a discount. There are two key advantages of factoring:.<br/><br/>Drastically improved cash flow As opposed to waiting to receive payment, the business gets most of the accounts receivable when the invoice is created. This reduction in the receivables lag can mean the difference between success and failure for companies operating on long cash flow cycles.<br/><br/> Say goodbye to credit analysis, risk or collections The finance company performs credit checks on customers and analyzes credit reports to uncover bad risks and set appropriate Invoice Factoring Company credit limits essentially becoming the businesss full-time credit manager. It also carries out 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 discounting is not as well-known as debt and equity, but it's often more useful as a business financing tool. One justification many owners don't consider invoice factoring first is because it takes some time and effort to make invoice factoring work. Lot of people today are searching for instantaneous answers and immediate results, but stopgaps are not always accessible or advisable.<br/> Getting it to Work.<br/><br/>For factoring to function, the business must achieve one essential thing: supply a top quality product or service to a creditworthy customer. Undoubtedly, this is something the business was created to accomplish to begin with, but it functions 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 promptly by the factoring company it doesn't have to wait 30, 60 or 90 days or longer to get payment. The business can then quickly pay its suppliers and reinvest the profits back into the company. It can make use of 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, establish strong supplier relationships and strengthen its financial statements. And by relying upon the invoice factoring company's A/R management products, the business owner can prioritize growing sales and increasing profitability. All this can take place without increasing debt or diluting equity.<br/>The average business uses a factoring company for about 18 months, which is the amount of time it usually requires to accomplish growth objectives, pay off past-due amounts and strengthen the balance sheet. Then the business will likely find themselves in a better position to look for debt and equity opportunities if it still has to.