Sources of finance

Where and how you finance an operation can be the difference between dominance and failure. Often it makes the most sense to tap a few different sources of capital. Here are a few best sources of finance:

Smart leases. Leasing fixed assets conserves cash for working capital (to cover inventory), which is generally tougher to finance, especially for an unproven business.

Bank loans. Banks are like the supermarket of debt financing. They provide short-, mid- or long-term financing, and they finance all asset needs, including working capital, equipment and real estate. Banks want assurance of repayment by requiring personal guarantees and even a secured interest (such as a mortgage) on personal assets. Unlike other financing relationships, banks offer some flexibility.

Local and state economic development organizations. Economic-development organizations can charge tantalizingly low interest rates when lending alongside a bank. Development groups may not agree to finance an entire operation, but they make snagging the remainder from other private sources a lot easier.

Customers. Advance payments from customers–assuming the terms aren’t too onerous–can give you the cash you need, at a relatively low cost, to keep your business growing. Advances also demonstrate a level of commitment by that customer to your operation.

Vendors. This way, your financiers do not control your growth; you do. Just be sure not to enslave yourself to a handful of powerful suppliers in the process.

Friends and family members. Friends and family members might be the most lenient investors of the bunch. They don’t tend to make you pledge your house, and they might even agree to sell their interest in your company back to you for a nominal return.

Internal Revenue Service. No, the IRS does not lend money. But it does allow you to deduct expenses. If you are paying a heap in taxes, evaluate whether you can use your profits to expand your business–and reduce your tax bill.

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