Financing Options

Key Takeaways

• If a new business hopes to get funding, it should prepare a financial plan - a document that shows the amount of capital that it needs for a specified period, how and where it will get it, and how and when it will pay it back.
• Common sources of funding for new businesses include personal assets, loans from family and friends, and bank loans.
• Financial institutions offer business loans with different maturities. A short-term loan matures in less than a year, an intermediate loan in one to five years, and a long-term loan after five years or more.
• Banks also issue lines of credit that allow companies to borrow up to a specified amount as the need arises.
• Banks generally require security in the form of collateral, such as company or personal assets. If the borrower fails to pay the loan when it's due, the bank can take possession of these assets.
• Existing companies that want to expand often seek funding from private investors. Angels are wealthy individuals who are willing to invest in ventures that they believe will succeed. Venture capitalists, though willing to invest larger sums of money, often want to cash out more quickly than angels. They generally invest in existing businesses with strong growth potential.
• Successful companies looking for additional capital might decide to go public, offering an initial sale of stock called an initial public offering (IPO).