<br/> <br/> Contrary to what most small business owners believe, funding a business is not rocket science. In point of fact, there are only three major methods to accomplish it: via debt, equity or what I all "do it yourself" finance.<br/><br/> Every method comes with benefits and drawbacks you should recognize. At various stages in your business's life cycle, one or more of these methods may be appropriate. For that reason, a thorough awareness of each method is crucial if you think you may ever want to obtain financing for your business.<br/><br/><br/>Debt and Equity: Pros and Cons<br/><br/>Debt and equity are what many 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 amount of time. These loans generally must be secured by collateral in case they can not be repaid.<br/><br/>The cost of debt is fairly low, particularly in today's low-interest-rate atmosphere. However, business loans have become tougher to come by in the current tight credit environment.<br/><br/>Equity financing is given by investors who receive shares of ownership in the company, in lieu of 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 in the long run can 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 funding that can handcuff owners, and they count on a very high rate of return on the companies they invest in.<br/>DIY Financing<br/><br/>My preferred 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 receivable factoring. With invoice discounting services, companies sell their outstanding receivables to a commercial finance company (sometimes referred to as a "factor") at a discount. There are two key advantages of factoring:.<br/><br/> Considerably bolstered cash flow As opposed to waiting to get payment, the business gets the majority of the accounts receivable when the invoice is created. This decrease in the receivables delay 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 executes credit checks on customers and scrutinizes credit reports to uncover bad risks and set appropriate credit limits essentially becoming the businesss full-time credit manager. It also performs 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 practical as a business financing resource. One explanation many owners don't consider factoring first is because it takes some time and energy to make invoice discounting work. Many people today are looking for fast answers and immediate results, but stopgaps are not always readily available or advisable.<br/>Making It Work.<br/><br/>For invoice discounting to function, the business must achieve one essential thing: supply a top-notch product or service to a creditworthy customer. Obviously, this is something the business was created to accomplish in the first place, 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 instantly by the factor it doesn't have to wait 30, 60 or 90 days or longer to receive payment. The business can then quickly pay its suppliers and reinvest the profits back into the company. It can use these profits to pay any past-due items, obtain discounts from suppliers or increase sales. These benefits will typically more than offset the fees paid to the invoice factoring company.<br/><br/>By receivable factoring, a business can boost its sales, develop strong supplier relationships and enhance its financial statements. And by relying upon the factoring company's A/R management programs, the business owner can focus on growing sales and boosting profitability. All of this can occur 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 attain growth objectives, pay off past-due amounts and boost the balance sheet. Then the business will likely be in a better position to search for debt and equity opportunities if it still has to.