A major part of business is obtaining the funds needed to start operations or continue current operations. Several options are available for business funds depending on the company's current operational status and financial needs. Small business typically needs start-up funds for their operations; medium size or larger companies may need funding to continue operations or expand and grow their business. Different funding methods will impact a company's financial statements in different ways. Debt funding may be seen more negatively than other funding methods since it creates fixed cash outflows for future business periods.
Debt funding is perhaps the most common form of business financing. Banks and other lenders offer funds to startup companies and current businesses at various terms depending on the business. Startup funds typically require lots of information and requirements for companies to obtain startup funds. Lenders require more information because the startup is riskier than established businesses. Businesses with established operations may obtain debt funding easier since they have a proven track record of sales revenue.
Equity financing occurs when large or publicly held companies find individual investors willing to invest their money into the company. These investors look for companies that offer solid financial histories of positive net income. Mutual funds or other investment groups may also make equity investments in a company on behalf of several investors. These investment groups can offer better returns for outside investors and provide companies with more cash at a single time.
Venture capitalists are individuals, groups or companies that offer companies private funds for operational purposes. These investors bypass the normal equity financing methods since they do not purchase stock in the company. Venture capitalists may request fixed payments or set return rates for investing in companies. Input on major business decisions may also be required by venture capitalists. This ensures that they earn specific return on their investment since they are taking on major financial risks with their invested capital.
Governments may offer grants to businesses meeting specific needs in the economic marketplace. Many grants are offered at the local and state levels since these governments have a better understanding of their local economy. The Small Business Administration (SBA) offers small businesses information on government grants and how they may be obtained. The SBA also offers banks guarantees to banks lending small businesses startup funding. These government guarantees helps smaller companies obtain bank financing without making major concessions to lenders.
Working capital is the optimal funding source for most business. Most companies use the profits generated from business operations to expand and improve their company. Companies may need to wait a few years before investing working capital into their operations. Business operations may not be profitable for the first few years, which can delay the company's ability to generate sufficient working capital for investing in the company.