<br/> <br/> Unlike what most small business owners believe, funding a business is not rocket science. In fact, there are only three main methods to accomplish it: via debt, equity or what I call "do it yourself" finance.<br/><br/> Every technique has benefits and drawbacks you should be aware of. At various stages in your business's life cycle, one or more of these methods may be appropriate. Therefore, a thorough understanding of each method is necessary if you think you may ever have to get funding for your business.<br/><br/><br/>Debt and Equity: Pros and Cons<br/><br/>Debt and equity are what lot of people imagine when you ask them about business financing. Traditional debt financing is normally provided by banks, which loan money that must be repaid with interest within a certain timespan. These loans normally must be secured by collateral in the event they can not be repaid.<br/><br/>The cost of debt is reasonably low, especially in today's low-interest-rate environment. However, business loans have become harder to come by in the current tight credit environment.<br/><br/>Equity financing is offered by investors who receive shares of ownership in the company, rather than interest, in exchange for their money. These are http://www.accountsreceivablefinance.org typically venture capitalists, private equity firms and angel investors. Although equity financing does not need to be repaid like a bank loan does, the cost ultimately 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 funding that can hog-tie 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 using a funding technique called invoice discounting. With invoice discounting products, 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 bolstered cash flow Rather than waiting to receive payment, the business gets most of the accounts receivable when the invoice is created. This decrease in the receivables lag can mean the difference between success and failure for companies operating on long cash flow cycles.<br/><br/>No more credit analysis, risk or collections The finance company does credit checks on customers and analyzes credit reports to uncover bad risks and set appropriate credit limits essentially becoming the businesss full-time credit manager. It also conducts 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 effective as a business financing resource. One main reason many owners don't consider factoring first is because it takes a while and effort to make invoice factoring work. Many people today are seeking quick answers and immediate results, but quick fixes are not always available or advisable.<br/> Getting it to Work.<br/><br/>For invoice discounting to function, the business must accomplish one essential detail: provide a top quality product or service to a creditworthy customer. Obviously, this is something the business was created to accomplish anyway, but it works 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 right away by the factoring company it doesn't need to wait 30, 60 or 90 days or longer to receive payment. The business can then promptly 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 usually more than offset the fees paid to the factor.<br/><br/>By invoice factoring, a business can grow its sales, build strong supplier relationships and enhance its financial statements. And by trusting in the factoring company's A/R management services, the business owner can concentrate on expanding sales and increasing profitability. All of this can take place without increasing debt or diluting equity.<br/>The typical business uses a factoring company for about 18 months, which is the period of time it usually takes to attain growth objectives, pay off past-due amounts and boost the balance sheet. Then the business will likely find themselves in a better position to pursue debt and equity opportunities if it still has to.