Methods of Financing Small Business

This article discusses various methods of financing small businesses, including seeking investors, borrowing from family or friends, applying for small business loans, borrowing against a home, securing a second mortgage, and using credit cards.

Running Head: BUSINESS MATHEMATICS
BUSINESS MATHEMATICS
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Table of Contents
Methods of Financing Small Business.......................................................................................2
Recommendations......................................................................................................................3
Reference....................................................................................................................................4

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Methods of Financing Small Business
Although there is certain business which does not require so much of the investment
initially but there are some small businesses that requires and ask for the financial help for
running the businesses. These financing will help the business for the down payment of the
location, business equipments that is required for the business needs and so many reasons.
For this, the strong plan of the business is required for getting the financial assistance from
the other party for funding of the business; it also guides making reserved and smart
decisions for spending on the new business (Hechavarría, Matthews & Reynolds, 2016).
Seeking Investors who will purchase equity in business- It involves raising the money
from the investors. Under this when the business owner uses the method of equity financing
then they sell the part of their interest of ownership in the business. However, the investors
buy the shares in exchange of the percentage of the proceeds for the future. The advantage of
this is less risk because no monthly payment is required and the disadvantage is loss of
control of the business that may lead to potential conflict (Klačmer Čalopa, Horvat & Lalić,
2014).
Borrowings from family or friends- If the entrepreneur have their family and friend who
have money and wealthy and they may have interest in the business expecting higher return
in future, then the entrepreneur may ask them for friendly loan. The advantage is of lower
interest rates and the disadvantage is that if there is any misunderstanding in relation to
arrangements then it will damage the relationship (Afful-Dadzie, Oplatková & Nabareseh,
2015).
Applying for the small business loans from a bank- Small business loan is also one of the
alternatives from the bank in order to finance the business. It requires checking of the credit
worthiness by bank. The advantage is tax benefit, lower interest rates and longer repayment

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terms and the disadvantage is collateral security required by bank for loan and tight
restrictions (Deffains-Crapsky & Sudolska, 2014).
Borrowing against a home- This is the method of financing the business by getting loan
from the bank against the home of entrepreneur. The advantage is that it is accessible and
convenient and the disadvantage is again security against loan that is too the home will be
very risky.
Securing the second mortgage- It is the assets or the property is used second time for
securing a fresh loan. The advantage is lower interest rates and the disadvantage is risk and so
many cost associated with this method.
Using credit cards- It is the method of financing the business with the help of raising finance
through credit card. The advantage is that it access to easy financing and encounter the
problem of cash and the disadvantage is cost associated with this (Hechavarría, Matthews &
Reynolds, 2016).
Recommendations
Hence, it is advisable to go through the method of small business loans. It is advisable
to use this method of financing because bank is always accessible and they provide the
benefit of tax which is the big concern of any business. Apart from this it also provides
generous term lengths such as term of 10 years that is very much beneficial for start-ups.

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Reference
Afful-Dadzie, E., Oplatková, Z. K., & Nabareseh, S. (2015). Selecting start-up businesses in
a public venture capital financing using Fuzzy PROMETHEE. Procedia Computer
Science, 60, 63-72.
Deffains-Crapsky, C., & Sudolska, A. (2014). Radical innovation and early stage financing
gaps: equity-based crowdfunding challenges. Journal of Positive Management, 5(2),
3-19.
Hechavarría, D. M., Matthews, C. H., & Reynolds, P. D. (2016). Does start-up financing
influence start-up speed? Evidence from the panel study of entrepreneurial
dynamics. Small Business Economics, 46(1), 137-167.
Klačmer Čalopa, M., Horvat, J., & Lalić, M. (2014). Analysis of financing sources for start-
up companies. Management: journal of contemporary management issues, 19(2), 19-
44.