<br/> <br/> Unlike what most small business owners think, financing a business is not rocket science. Actually, there are only three major means to perform it: via debt, equity or what I call "do it yourself" finance.<br/> Each and every method comes with benefits and drawbacks you should take note of. At various stages in your business's life cycle, one or more of these methods may be appropriate. For that reason, a complete knowledge of each approach is important if you think you may ever have to get financing for your business.<br/>Debt and Equity: Pros and Cons<br/>Debt and equity are what most people imagine when you ask them about business financing. Traditional debt financing is typically provided by banks, which loan money that must be repaid with interest within a certain amount of time. These loans normally must be secured by collateral in the event they can not be repaid.<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/>Equity financing is given by investors who receive shares of ownership in the company, as opposed to interest, in exchange for their money. These are typically venture capitalists, private equity firms and angel investors. Even though equity financing does not need to be repaid like a bank loan does, the cost ultimately can possibly 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 chain owners, and they count on a very high rate of return on the companies they invest in.<br/>DIY Financing<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 utilizing a financing technique called factoring. With invoice factoring services, 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/>Drastically increased cash flow Rather than waiting to get payment, the business gets most of the accounts receivable when the invoice is generated. This decrease in the receivables lag can mean the difference between success and failure for companies operating on long cash flow cycles.<br/>No more credit analysis, risk or collections The finance company executes credit checks on customers and scrutinizes credit reports to uncover bad Invoice Factoring Company risks and set appropriate credit limits essentially becoming the businesss full-time credit manager. It also carries out 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/>Factoring is not as widely known as debt and equity, but it's often more effective as a business financing resource. One explanation many owners don't consider factoring first is because it takes a while and effort to make invoice factoring work. Lot of people today are searching for fast answers and immediate results, but stopgaps are not always readily available or advisable.<br/>Making It Work.<br/>For factoring to work, the business must achieve one extremely important detail: provide a top quality product or service to a creditworthy customer. Naturally, this is something the business was created to perform anyway, but it acts as a built-in incentive so the business owner does not forget what he or she should be doing anyway.<br/>Once the customer is satisfied, the business will be paid promptly by the invoice factoring company it doesn't have to wait 30, 60 or 90 days or longer to get payment. The business can then quickly pay its suppliers and reinvest the profits back into the company. It can utilize these profits to pay any past-due items, obtain discounts from suppliers or increase sales. These benefits will often more than offset the fees paid to the factor.<br/>By receivable factoring, a business can increase its sales, establish strong supplier relationships and strengthen its financial statements. And by trusting in the factoring company's A/R management products, the business owner can focus on expanding sales and boosting profitability. All this can take place without increasing debt or diluting equity.<br/>The average business uses factoring companies for about 18 months, which is the amount of time it usually requires to attain growth objectives, pay off past-due amounts and strengthen the balance sheet. Then the business will likely find themselves in a better position to investigate debt and equity opportunities if it still has to.