Starting a business can be a little tricky due to lack of capital. However, this problem is easy to solve once a reliable source of funding is found. Any kind of funding is excellent to start the business, but before signing contracts with any investors, you must first understand in depth the type of financing you seek. Here are the three types of funding that will be offered to you. Ensure to choose the investment that matches best with your company.
Financing based on time can be split into long-term, medium-term and short-term plans. There are different conditions and sources for the three periods. For long term funding, an investor can turn to bases such as share capital, equity shares or financial institutions like the government and banks. For medium-term, sources such as lease finance and hire purchase finance are more suitable. Sources like trade credit and factoring services are most compatible with short term financing.
Ownership and Control Based
To get capital, an investor may choose to bear all the risk themselves and use borrowed money while others believe in sharing the risk with others. Sources of borrowed capital are commercial banks or the general population in terms of debentures. When investors decide to share their risks, sources such as retained earnings and convertible debentures come in handy. When one uses borrowed capital, there is no dilution of the ownership and control of the business. On the other hand, when the risk is shared, the risk-takers also share ownership of the company.
Source of Generation
Financing can be generated either internally or externally. Internal sources come from the funds made by the business such as retained profits or sale of assets. External sources come from outside the company, for example, using equity and debts from banks. The best part about using internal generation is that the business gets the chance to grow itself.