10 Sources of Funding for

Small and Medium-Sized

Businesses
Content

1 Personal investment

2 Borrowing from friends or family

3 Business angels

4 Venture capital

5 Loan

6 Leasing

7 Credit line / Overdraft

8 Factoring

9 Trade finance

10 Bond placement
Most up-and-coming entrepreneurs have great ideas but often lack
sufficient capital to start a business. Bank loans for small start-ups
are not easy to get, especially without collateral. If a company is
already up and running, additional funds are needed for ongoing
development and growth.

This is why we've put together this guide on the different ways to
raise money at every stage of a business's development. Some
entrepreneurs are able to raise money from people close to them,
while others apply to investment funds or use personal savings. To
help you find the best way, we look at 10 different funding sources
and provide you with valuable insights and tips for setting up and
developing your business.

 1 Personal investment

One of the best ways to fund the establishment of a business is a

personal investment. Whenever possible, it is always better to start

a business by investing your own money.

It is unnecessary to fund the total amount of the business needs.

Still, it is worth trying to put up between 25 and 50 per cent of the

required capital. This will show potential investors and lenders that

you are prepared to assume some of the risks and are convinced of

the business's viability.

Putting in at least 25 per cent of the capital from your personal

funds is also worthwhile because you will secure a favourable

position when negotiating with potential lenders. And because you

will own a sizeable chunk of the business personally, other sources

will be more inclined to help with the rest because you will already

have fulfilled what is often one of their conditions. This may also

facilitate access to a bank loan for your business.

 2 Borrowing from friends or family

One of the most common ways to fund start-ups is by using a loan

from friends or family. But when relatives become your creditors,
both funds and relationships can be put at risk.

To avoid any misunderstandings, you should draw up a financial

agreement and a written contract for a loan. These should indicate
when your relatives will get their money back, reduce the risk of any
disagreements developing, and show your relatives that your
approach to the loan is serious.

It is also essential to consider how the agreement will be structured:

whether you will repay as much as you have borrowed or if you will
offer minimum interest payments. Informing your lenders about the
risks is just as important. Make sure you present a strong business
plan but caution your relatives that there is always a possibility that
they will lose their money.

 3 Business angels

Small and medium-sized enterprises searching for funds to launch

their business often prefer business angels. These angels can be
private individuals, for example, who invest at an early stage in
exchange for ownership of some of the company's equity. Unlike
traditional investors, business angels usually differ in that they
invest smaller amounts, make rapid investment decisions, and rarely
insist upon taking a controlling stake. Therefore, this funding option
is very convenient for start-ups that do not need large amounts of
investment and want to maintain greater business control.

The greatest challenge in obtaining funds from business angels is

making your proposition sufficiently attractive. Business angels
choose where to invest their money, so it is essential to know how to
get their attention.

Having an appealing and well-developed idea is vital. Such an idea

should be registered with dedicated, which bring together business
angels and those launching start-ups. When presenting a project to
business angels, you should highlight the strengths of the idea, and
the presentation should convince them that all that is needed to
launch it is the proper financial support.

 4 Venture capital

Venture capital is one of the most attractive funding opportunities

when it comes to starting a new business. Venture capital is money
put into new companies that can achieve rapid growth but also
come with substantial risk. Entrepreneurs often turn to venture
capital funds when traditional forms of finance such as bank loans
are not accessible to them because of perceived unreliability or risk.
Venture capital can be obtained at any stage of business
development.

Unlike other forms of funding when an entrepreneur is required to

repay the capital and any interest, venture capital investments are
provided in exchange for a shareholding in a company. So the
venture capital fund obtains powers over corporate governance.

In exchange for venture capital, entrepreneurs expect a high return

on their investment. This means that the relationship between the
two parties can be long-term. Instead of repaying the loan
immediately, a business owner will have to work for five or 10 years
with their venture capital investors. At the end of the deal,
entrepreneurs who have lent the money will sell the shares to the
owners or through a public auction, expecting a return much higher
than their original investment.

Differences between business angels and

venture capital funds

While both investors provide capital to start-ups, there are some

significant differences between venture capitalists and business

angels. The biggest difference is that venture capital comes from

either a company or business. In contrast, business angel

investments are made by private individuals.

The second difference is related to funding capacity: companies

usually invest huge sums, while business angels will usually only

offer more diminutive amounts.

One more difference is that venture capitalists will typically invest in

any start-up they think will generate a high return. At the same time,

business angels will seek investment in companies operating in

industries they are already familiar with. Besides, business angels

do not always require an active role in the structure of the business

in the way that venture capitalists do.

 5 Loan

A loan can be another source of business funding. With a loan, you

get a lump sum and use it for the development of your business.
Repayments are either daily, weekly or monthly, depending on the
loan agreement. This source of funding allows you to easily plan the
financing of your business.

Fast loans

Fast loans are granted for three to 18 months and are usually
designed to help a business overcome unforeseen problems.
However, these rapid sources of finance are expensive. Such loans
are generally for amounts that are much smaller than traditional
ones. Still, their annual interest rates can be around 14 per cent or
more. Fast loans are convenient because they do not require
long-term commitments, and they can be obtained by any business.
Traditional loans

Traditional loans are intended for more stable companies and

businesses which are already established. The loan amounts are
higher but are not so easy to obtain. While there are more
commitments, the interest rate is usually lower.

These loans are granted for one to five years, and although they are
not issued as quickly as a fast loan, you can expect to receive
funding in fewer than 10 days.

However, only about 20 per cent of small or medium-sized

businesses are eligible for traditional loans. Suppose a company
does manage to obtain a traditional loan. In that case, it is
considered to be a great success because it is usually the safest
form of funding. Large loans by banks can be repaid over a long
period. With regular payments, the company will maintain business
stability and reduce the need for additional investments to a
minimum.

Such loans are suitable for businesses with an idea for a specific
project: a marketing campaign, development, or an experimental
new product.

 6 Leasing

Leasing is a way of acquiring the supplies a company needs by

making partial payments for assets that can be used immediately.

A business only needs to make a down payment and then pay fixed
monthly amounts. Assets acquired this way can be used for
business development.

Leasing is divided into two types:

1. Financial leasing. During the term of financial leasing, the client

must pay the full acquisition price of an asset, interest, and VAT.
When the term of the lease expires, the client owns the asset.

2. Operating lease. During this lease, the leasing company acquires

the client's assets and transfers them to the client to use until the
due date. During the contract period, the client makes payments. At
the end of the contract, they can choose to return the asset to the
leasing company, enter into a contract for new assets or extend the
lease.

Leasing is a helpful way to access business funding because there is

no need to pay an additional deposit. The asset itself is the guarantee

the company uses while still owing money on the lease. You can

choose the leasing conditions according to your financial situation

and a payment schedule, the period, and the initial payment. Leasing

is an effective way of maximising an asset's effectiveness because a

business can profit from it while making monthly payments and then

reinvesting the resulting added value in the development of the

company.

As with other funding methods, leasing does not come without risk.

This is related to the inadequate fulfillment of obligations. When it is

late with its repayments, a business damages its credit record. When

it breaches a leasing contract, the finance on the lease can be

terminated. The business may become subject to debt recovery and

the repossession of the asset that the lease agreement was made on.

 7 Credit line / Overdraft

Credit lines work in a very similar way to credit cards: a business

gets access to funds that can be used whenever needed. Interest is
charged only for the money withdrawn and used. When the borrowed
money is repaid, the credit available returns to the original
business's total amount.

You can use a credit line in any way your business needs: wait
before drawing down the money until the moment you need it or use
it whenever you want.

A credit line is much more advantageous than a bank loan as there

are no fixed repayment dates and schedules. This is a very
convenient way to fund small seasonal businesses which need to
hold some capital in reserve for emergencies. If a company is
considered viable, a credit line offers low interest and large sums.

The weaknesses and risks associated with credit lines are that
penalties for late payments are much higher than those for loans.
Furthermore, if a business is considered a bad debtor, it will face
much higher interest rates.

 8 Factoring

Factoring is offered by Factris and is an asset-based funding system

for small businesses. How does it work?

We fund outstanding corporate accounts, which later become

security for the funding. A company receives financing (up to 100
per cent) for goods or services sold, paying us a finder's fee from 0.5
per cent on the amount of the account being paid. The buyer returns
the money to the financiers in the amount stated in the account.

This solves some of the common problems encountered by a young

business, particularly late payments by customers, resulting in a
destabilising shortage of working capital and, potentially, missed
payments to suppliers and other creditors.

With the factoring service, an enterprise can obtain money for

outstanding accounts right away without risking growth and
development processes. In other words, a steady flow of working
capital and the integrity of a company's operations are ensured.

 9 Trade finance

The trade finance service is aimed at managing trade payments with

greater ease and lower risk. It includes three types of funding:

Letter of credit. This instrument is used in cases where a company

is in the early stages of a relationship and does not know its
business partner particularly well or has doubts about a client's
solvency but wants to be sure about the delivery of goods or
payment. At the request of the seller of goods or services, a bank
assigns a documentary letter of credit through which it undertakes
to pay the seller for the delivered goods, works, or services. The
seller undertakes to provide the bank with documents on the terms
and conditions.

Documentary collection. This is a method of international trade

payment which allows the seller to retain control of the goods until
the buyer makes a payment (or until a written commitment to pay in
the future is provided). This method is recommended for business
partners who have worked together in the past and have built up a
degree of mutual trust. It is a simple and inexpensive way to reduce
the risk of international trade: the seller is confident that the
ownership of goods will pass to the buyer only after payment. The
buyer does not have to make any prepayment for the goods.

Guarantee. A bank guarantee is offered to ensure that a business

partner or an issuer of a call for tender will fulfill its obligations. A
bank that grants a guarantee undertakes to pay the amount
specified in the guarantee if the enterprise for which the guarantee
is issued fails to fulfill its obligations. This service helps to reduce
the risk of transactions and ensure that the parties involved in a
transaction fulfill their obligations, and enhance mutual trust
between business partners.

 10 Bond placement

Bonds are an acceptable alternative to bank credits. They are more

advantageous than credits. They allow a company to obtain funds
on acceptable terms drawn up, taking into account market demand
and including the currency, term, interest rate, payment structure,
etc. In the case of bank credits, banks can impose bans and
regulations that can restrict a company's activities and, in practice,
do not necessarily improve the chances that the company can
actually repay the loan.

One disadvantage of bonds is that they are a more expensive source

of funding than bank credits, and this is particularly true with bonds
issued by companies that are not yet well known or have yet to
acquire a good reputation in the market. Bonds issued by reputable
companies don't usually offer higher interest rates than bank credit.
Still, companies often use bonds as an alternative source of funding,
particularly when bank loans are no longer available.

One more difficulty related to bonds is that there is no guarantee

that they will be successful just because they have been placed.
Failure may be due to any factor which results in a lack of demand
for a particular company's bonds, such as limited market size or a
general lack of knowledge about the issuer. Moreover, every time a
bond placement fails, the image of the company can suffer.

However, bonds are one of the safest forms of investment. The

redemption of bonds issued in Lithuania and interest payments are
ensured through various means (by property pledge, for example).
Furthermore, there are clear bond issue conditions, an option to sell
them on to another investor at any time before their maturity date,
and a clear means to calculate the likely return on investment.
Finally, the company may no longer obtain additional borrowing
conditions without bond redemption, so bonds remain very attractive
to investors.

Summary

There is no single best source of funding for every eventuality. Every

business is different, and it is worth considering your particular
situation.

However, now that you are familiar with 10 of the most common
options, you should be better informed about obtaining funding for
your business. All that remains is to choose the best funding method
to meet your specific business needs.

Good luck!