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The industrialists who have set up small business need to get sources of outside financing and funds with the intention to grow operations. External or outside financing has two distinct forms: equity or debt. The debt financing involves promissory notes, bank loans, and credit card purchasing. On the other hand, equity financing is the kind of external financing in which the businesses sell off their shares of ownership to some outside sources.
The most common and simplest source of alternative financing for the small business is the bank loans. In the procedure of acquiring loans from banks, the corporate submits the loan application to the savings and loans, banks, or other fiscal institution. In the application, the applicant will tell the purpose of getting the loan, the information related to the corporate credit history, and the requested amount. The bank will analyze the provided data and will decline or approve the application and determine the loan interest rate. In the case in which the corporate fails in repaying the principal along with interest in the prescribed time duration, the bank has the right to claim any security or collateral the corporate provided with the intention to secure its loan.
Another method to acquire alternative financing for the small businesses is that the corporate can issue the bonds for the debt financing. Let’s understand it with an example; for corporate involved in the industrial development, the IDRB i.e., Industrial Development Revenue Bond program works in collaboration with the local public agencies for paying them for mega industrial projects. The corporate that receives the approval of IDRB is permitted to issue the bonds plus make these bonds available for the private investors. In this case, the corporate must reimburse the interest and principal on that bond to the public agency which pays out the proceeds to the financiers.
The companies that prefer to stay away from the liabilities coming with the debt financing have another option in obtaining an additional capital with the help of equity financing. In equity financing, one of its sources is known as “angel investor”. The angel investors make their contribution to the improvement of the equipment capital plus strategies related to marketing in substitute of the small equity portions of the finance acquiring corporate. In return, the angel investor’s hunt for the corporate having high potential plus above-average return rates on investment (ROI).