Sources of Financing for Businesses

Businesses for sale can be classified by deal-size. Businesses that are valued below $ 2 Million are classified as main-street businesses, businesses valued between $2 Million and $5 Million are classified as lower middle market, while businesses that are above $5 Million are classified as upper middle market. This blog tends to focus on main-street and lower middle market businesses.

Main-street and lower middle market businesses need to raise money for several reasons. Some common reasons are business growth and expansion, working capital fluctuations, refinancing existing loans, replacing existing equipment, and paying the owner. Financing for growth and expansion is the most common reason for main-street and middle-market businesses.

There are several sources for financing business operations or businesses acquisitions. Some of these sources are:

  1. Friends and Family
  2. Government grants
  3. Crowd sourcing
  4. Trade credit
  5. Personal credit cards
  6. Personal loans
  7. Business credit cards
  8. Lease
  9. Bank and Credit Union loans
  10. Asset based lender
  11. Angel Investment
  12. Venture capital
  13. Private equity investment
  14. Mezzanine lender

Bank loans are the most common source for financing business acquisitions and business operations. Asset based lending is also commonly used.  Asset based lending refers to lending secured by an asset. If the loan is not paid the asset is taken over by the lender.

Angel investment, venture capital investment and private equity investment plays a key role in raising money. These investors provide capital for ownership equity or convertible debt. Interestingly, business and personal credit cards are also commonly used for short-term financing of business operations.

Mezzanine lenders provide the additional (incremental) funding required for completing a business acquisition or business expansion project. It is usually structured as a hybrid between debt and equity financing for business expansion. Mezzanine financing may be debt financing, but gives the owner the right to convert debt to ownership equity in the company at a set price.