Contrary to what most small business owners believe, funding a business is not rocket science. Really, there are only three primary ways to do it: via debt, equity or what I call "do it yourself" funding.<br/><br/> Each and every method has 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. businessinvoice.org/ For that reason, a complete knowledge of each procedure is necessary if you think you may ever want to get financing for your business.<br/><br/><br/>Debt and Equity: Pros and Cons<br/><br/>Debt and equity are what lot of people imagine when you ask them about business financing. Traditional debt financing is usually provided by banks, which loan money that must be repaid with interest within a certain timespan. These loans usually must be secured by collateral in the event that they can not be repaid.<br/><br/>The cost of debt is fairly low, particularly in today's low-interest-rate environment. However, business loans have become more difficult 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, instead 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 might 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 financing that can hog-tie owners, and they expect a very high rate of return on the companies they invest in.<br/>DIY Financing<br/><br/>My 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 invoice discounting. With receivable factoring services, companies sell their outstanding receivables to a commercial finance company (sometimes referred to as a "factor") at a discount. There are two key benefits of factoring:.<br/><br/> Noticeably increased cash flow Rather than standing by to receive payment, the business gets the majority of the accounts receivable when the invoice is generated. This reduction in the receivables lag can mean the difference between success and failure for companies operating on long cash flow cycles.<br/><br/> Say goodbye credit analysis, risk or collections The finance company performs 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 conducts 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 Factoring is not as well-known as debt and equity, but it's often more helpful as a business financing instrument. One explanation many owners don't consider invoice factoring first is because it takes a while and energy to make invoice discounting work. Many people today are searching for instant answers and immediate results, but stopgaps are not always readily available or advisable.<br/> Getting it to Work.<br/><br/>For invoice factoring to function, the business must accomplish one very important thing: provide a top-notch product or service to a creditworthy customer. Of course, this is something the business was created to do anyway, 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 promptly by the invoice factoring company it doesn't need to wait 30, 60 or 90 days or longer to get payment. The business can then promptly 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 generally more than offset the fees paid to the factor.<br/><br/>By receivable factoring, a business can increase its sales, build strong supplier relationships and strengthen its financial statements. And by trusting in the invoice factoring company's A/R management products, the business owner can concentrate on growing sales and increasing profitability. All of this can happen without increasing debt or diluting equity.<br/>The average business uses factoring companies for about 18 months, which is the time it usually takes to attain growth objectives, pay off past-due amounts and boost the balance sheet. Then the business will likely find themselves in a better position to investigate debt and equity opportunities if it still needs to.