What are three different sources of financing for smaller companies? What advantages and disadvantages do each present?

Question

What will be an ideal response?

Answer 1

When financing a small business, an owner almost always relies first on personal savings, followed by investments by family and friends, and maybe a credit card or two. Personal savings is by far the most common source of equity used to finance a small business. Both lenders and investors are unlikely to loan money or invest in the business if the owner does not have his or her own money at risk. Also, in the early years, a firm can ill afford large fixed loan payments for debt repayment.   

Friends and family provide almost 80 percent of startup capital beyond the entrepreneur's personal savings. Loans from friends and family can often be obtained quickly, because they are based more on personal relationships rather than financial analyses. However, borrowing from friends and family should be thought of a high-risk source of money due to the potential of putting personal relationships at risk. To minimize the chance of damaging important personal relationships, the entrepreneur should plan to repay such loans as soon as possible. In addition, any agreements should be put in writing.
For someone who cannot acquire traditional financing like a bank loan, credit card financing may be an option. Credit cards have the advantage of speed. A lender at a bank must be convinced of the merits of the business opportunity, and that involves extensive preparation on the part of the entrepreneur. Credit card financing, on the other hand, requires no justification for the use of the money. However, the interest costs can become overwhelming over time, especially because of the tendency to borrow beyond the ability to repay.