If you are a new business seeking finance, you will be keen to explore the different avenues available to prospective borrowers. It costs money to start a business, and your early financial choices could affect how you run your business for years to come.
Options for startups and small businesses include traditional investment loans, commercial loans, and grants – but what is the difference? To understand where investment, loans, and grants differ, we must explore the nuances of the terms “funding” and “financing” and what they both mean for new businesses.
Funding and financing: what’s the difference?
Although the two words are used interchangeably, there is a distinct difference between funding and financing. Funding is money provided by a company or government for a specific purpose, whereas financing is the process of receiving capital that you will eventually have to pay back, such as a commercial loan or investment loan.
Funding is usually given to a business or organization on the basis of an agreement. It doesn’t usually have to be paid back. This type of funding is also known as a grant. Although there are generally no requirements for companies to pay back the capital, those who receive the funding will still need to abide by certain contractual agreements. These might include charitable or environmental initiatives, as well as areas of research and scientific studies.
If it sounds too good to be true, that’s because, for most businesses, it is. Grants are limited to relatively small amounts of money. They also have highly strict criteria that you must fit if you wish to receive funding. If you do acquire a grant, you will be extremely limited in what you can use the money for. Funding can also come from public donations and is often provided by large community organizations to further education or awareness programs.
Financing is a cash advance provided to a business with the expectation of having it paid back. Unlike funding, the money must be repaid in full, plus interest, within a specified repayment period. Loan terms can be anything from a few months to 30 years. Commercial loans like these are often provided by institutions such as banks, venture capitalists, or investors.
Investors may agree to loan your business money in exchange for a cut of the profits. Some startups choose to approach so-called “angel investors” to help them launch. Angel investors are individuals who will loan small businesses money to help them raise the capital they need. Some investors will become silent partners in your business, whereas others will want a hand in how you run your organization.
Which is the best option for your business?
More and more people want to become entrepreneurs but starting a business can be near-impossible if you don’t have the funds. Thankfully, there is a range of finance and funding options for small businesses you just need to call or email us and we will help you!