Chapter 4

Main types of finance

It takes money to make money. So what sort of finance options are there? Here are the types that fund most businesses.

A person in construction holds a clipboard and bag of money.

Introducing the finance family

Common finance options

Debt (loans)

Term loan: A lump sum repaid over a fixed time

Line of credit/credit card: Funds that are available to use when needed

Peer-to-peer lending: A crowdfunded loan

Friends and family: When those close to you lend you money

Invoice financing: An advance on the invoices you’ve issued

Equity finance (investors)

Equity crowdfunding: Where the public can invest in your business

Angel investors: Individuals who invest their own money

Venture capital: Professional investment groups

Friends and family: When those close to you buy into the business

Incubators and accelerators: Development schemes to build and boost small businesses

Other (revenue)

Grants: Funds that don’t have to be repaid

Presales: Customers pay before an item is generally available for purchase. This can include rewards-based crowdfunding.

The type of finance you choose matters

When you’re desperately keen to buy, start or grow a business, you may feel like any finance will do. Don’t fall into that trap. Choosing the wrong type of finance could break your business later, or severely hamstring it.

Each finance type has its own pros and cons. Use this guide to learn about them. Ask which suits your business, and you as a person – because that matters too.

Begging, borrowing, and bootstrapping

Some businesses don’t require a lot of money or capital at the outset. For example, you might only need a laptop and an internet connection if you’re offering a home-based service like proofreading or bookkeeping.

Other businesses start out really small, with minimal money, and build slowly. This is often called bootstrapping. In these cases, it’s common for owners to cobble together their own finance through personal savings, personal loans, or taking extra shifts at their day job. Even if you’re doing that, it’s worth knowing about the types of finance out there. You may just need an extra injection of cash down the road to get the business truly humming.

Disclaimer: Xero does not provide accounting, tax, business or legal advice. This guide has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.

How to finance your business

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