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Small Business Finance Explained

Sep 30th 2015
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Small business financing (also referred to as startup financing or franchise financing) refers to the means by which an aspiring or current business owner obtains money to start a new small business, purchase an existing small business or bring money into an existing small business to finance current or future business activity. There are many ways to finance a new or existing business, each of which features its own benefits and limitations. In the wake of the recent financial crisis, the availability of traditional types of small business financing dramatically decreased. At the same time, alternative types of small business financing have emerged. In this context, it is instructive to divide the types of small business financing into the two broad categories of traditional and alternative small business financing options.

There have traditionally been two options available to aspiring or existing entrepreneurs looking to finance their small business or franchise: borrow funds (debt financing) or sell ownership interests in exchange for capital (equity financing).

The principal advantages of borrowing funds to finance a new or existing small business are typically that the lender will not have any say in how the business is managed and will not be entitled to any of the profits that the business generates. The disadvantages are the payments may be especially burdensome for businesses that are new or expanding.

In the wake of the decline of traditional small business financing, new sources of debt and equity financing have increased including Crowdfunding and Peer-to-peer lending. Similar to crowdfunding, new ways to acquire debt financing from friends and family include sites like TrustLeaf, to avoid the awkwardness of asking to borrow money in person.

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Rowan Webb
By Rowan Webb
Dec 5th 2016 22:48 EST

I'm really enjoying crowd funding sites and seeing how different people go about getting financing from the public based on a business idea that they may have. It's truly quite intriguing to see the kinds of ideas that pop up on sites like these and even more impressive how there are so many people who agree that a product like what is on offer is in demand!

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Rowan Webb
By Rowan Webb
Dec 19th 2016 22:35 EST

I'm really enjoying crowd funding sites and seeing how different people go about getting financing from the public based on a business idea that they may have. It's truly quite intriguing to see the kinds of ideas that pop up on sites like these and even more impressive how there are so many people who agree that a product like what is on offer is in demand!

Thanks (0)