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Whether your business is relatively new or has been around for decades, there is a more than fair chance that the need for outside capital has come up at one point or another. Whether it was short-term capital needed to undertake a large project, or long-term financing needs for new equipment or even a business acquisition, the eventual need for outside capital for continued business growth is a very real concern for many small and medium businesses.

The reasons a business can need outside capital are endless. The types of capital and sources available in the market are plentiful, you may not even be aware of some of the many options. Navigating them can be admittedly painful, frustrating, and confusing. If the person you are speaking with represents some but not all of the various options, which will often be the case, you are likely to get a biased opinion of what is best for you and your business.

The purpose of this article is to inform you of some of the various options available, not to endorse any particular products. All capital products exist for a reason, they just may not make sense for your particular situation. Understanding what is available can help you make more informed decisions for your business.

Most all financing needs can fall into one of two buckets, debt or equity. Debt financing comes in the form of borrowing capital from a given source with the requirement of paying back the principal borrowed over time with interest. Equity financing involves the sale of ownership interest in exchange for capital. Hybrid financing combines two or more financial instruments and will carry characteristics of both debt and equity financing.

Types of Debt Financing

Bank and Credit Union lending – Most of you are likely familiar with these types of loans. These are term loans where a set amount is borrowed to be paid back over a set period of time. Typically, you would need some type of collateral for these types of loans or must have a track record of strong financial performance in your business. You will often be required to personally guarantee the loan, meaning you still owe it personally if the business fails. For a startup business, traditional bank financing can be difficult or impossible to obtain.

Trade credit – Many businesses must buy from suppliers routinely as part of their business model. If so, then trade credit from those suppliers can be a viable financing option. Trade terms can vary, but 30, 60, and 90-day trade accounts are the most common. This allows time to obtain your supplies, perform your service, or sell your products, and then collect from the customer before the payment to suppliers is due. Many suppliers will offer discounts if paid early.

Receivables Factoring – If you sell to your customers on credit, then you will carry an accounts receivable balance. Factoring is a service where a company will buy your receivables from you at a discount; then they will collect the amounts due from your customers. Not all factoring companies are the same and neither are the terms under which they operate. In some cases, if the invoice is not paid by the customer to the factoring company, you can be forced to repurchase the unpaid invoices. Another potential caveat is now having an outside company contacting your customers for payment.

Borrowing from Family/Friends – Borrowing money from friends and family is certainly an option that many startups have used. The terms can be more flexible than traditional banking, but then again, you need to know someone with the capacity to make the loan. As such, this may or may not be a good option for many small businesses.

Credit Cards – Early on, many small businesses utilize credit cards. While the rates on these cards can be much higher than traditional bank financing, obtaining them early on in your business may be substantially easier. Many cards will give you intro rates for the first 12-18 months, letting you take advantage of low or even zero interest rates. You may or may not have to personally guarantee the credit card debts as the owner.

Types of Equity Financing

Individual Investors – This could involve reaching out to family and friends or possibly another wealthy individual in your circle of influence. Depending on the size of your capital needs in relation to your business performance, you may have to give up a higher percentage of your equity than desired. Finding individual investors can be quite the difficult task, but this technique has been a very effective one for many fledgling businesses.

Crowdfunding – This is essentially when a group of investors pools their funds to buy equity (and sometimes debt) stakes in businesses. The types of investors allowed into these crowdfunding pools are more flexible than in the past as recent legislation has opened the door to this type of investment to over 300 million potential investors.

Angel Investors/Venture Capital – Both of these types of equity financiers tend to come in during the early stages of a business and serve startups as opposed to seasoned businesses. Angel investors are typically individuals or small groups of individuals lending smaller amounts (less than $1 million) of capital in exchange for shares of equity. Venture capital funds are more formalized groups of investors, often limited partnerships. Also referred to as VC, venture capital typically comes into play later in the business cycle of a startup than angel financing, often with amounts starting out at $1 million. Venture capital will typically, but not always, seek a defined return over a defined period of time, and equity can be repurchased from the VC firm at that time.

Private Equity – Private equity can be very similar to Venture Capital in many ways, but a key distinction is that private equity is not wholly focused around the startup business community. There are over 1,000 private equity funds serving a variety of capital needs in various industries for all stages in the business cycle. A popular misconception about P.E. (Private Equity) is that the only purpose is to purchase 100% of a company’s equity with the sole purpose of restructuring and selling at a gain. While some funds may be designed for this, it is incorrect to assume all operate in this manner. Many will buy less than 100% of the Company equity and will keep the existing management team in place with the goal of aligning their interests with ownership and management to increase company valuation. Some P.E. funds require the eventual exit of existing ownership while many others do not.

Types of Hybrid Financing –

The types of hybrid financing available continues to evolve as business needs change. Hybrid financing is a combination of financial instruments using some debt and equity components. One example of this would be convertible debentures. A debenture is merely an unsecured loan. A convertible debenture might issue capital in the form of a short-term loan with the option to convert to shares of equity if the principal is not repaid under the agreed upon terms. Another common type of hybrid financing are preferred shares of equity. Preferred equity stakeholders get paid before common equity stakeholders. If there are not sufficient profits to satisfy the preferred dividends, then the unsatisfied amounts can become debt owed in a future year.

It would be impossible to list all of the various types of hybrid financing available in this post as new concepts and ideas are constantly hitting the markets. Some types never pick up steam while others are used to fill in gaps to move deals forward, aligning the objectives for investors and borrowers.



This is merely a surface level view of the various types of business financing available. You can certainly take a much deeper dive as there are businesses entirely focused on helping business borrowers navigate the various capital raising options. There are options for businesses of virtually all sizes and stages, but there is a unique cost which comes with each type and variety. It stands to reason that the riskier the loan is for the debtor, the higher the interest rate you will be paying. Equity almost always costs more than debt, as you are giving up a piece of future growth. Hybrid financing can often give options to the borrower to absorb costs in the form of debt instead of equity.