Forms of Financing

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Revolver, subordination, mezzanine, collateral, ratchet, amortization…sometimes the jargon of business finance obscures more than it illuminates. As a consequence, it can be hard to distinguish the meaningful differences among different forms of financing.

Spot the Difference
It can be hard to distinguish among different forms of financing.

In this module, I’m going to give you a whirlwind tour of the different forms of financing you’re most likely to encounter as a small business. I’ll introduce key concepts that will enable you to distinguish one from the other. By knowing what’s available and their substantive differences, you’ll be better equipped to choose the right financing for your business over time.

More specifically, I’ll discuss the following potential sources of financing:

  • Cash from operations
  • Debt
  • Equity
  • Mezzanine
  • Other

It’s tough to serve more than one master. That’s one reason why customers are the best source of financing. Before you seek external financing, take a critical look at your cash from operations.

  • What might you do to improve your overall profitability?
  • What opportunities might there be to accelerate your cash cycle by shortening your receivables collection period or reducing your inventory levels?
  • How much growth can you afford?

Sometimes, you can defer – even eliminate – your need for external financing by managing the cash you have more efficiently. That said, bootstrapping isn’t always feasible – particularly for a fast-growing product business.