By Matthew Gillman, Business Financing Expert & SMB Compass Founder
Almost all kinds of businesses eventually find themselves looking for an external source of capital. Medical businesses, specifically, have to secure enough cash to invest in top-of-the-line medical diagnostic equipment and provide high-quality medical services to their patients.
But between financing and funding, how will you choose which financial resource is right for your practice’s needs and goals?
Financing vs. Funding: What’s the Difference?
Financing and funding are two common terms often used interchangeably in business. While both options can offer the capital injection you need for your practice, they contain key differences that make them unique from each other.
Let’s explore each option.
Financing involves borrowing money from financing institutions (i.e., banks or alternative lenders) or asking for money from investors (i.e., venture capitalists, angel investors, etc). The purpose of financing is to get enough capital to help businesses achieve their goals.
Financing can be obtained from a lot of sources. Common examples include traditional financing institutions, alternative lenders, venture capitalists, and share capital. Here’s how each works.
Business lending institutions usually provide debt financing to small business owners through a business loan. The company then repays the loan in increments over a predetermined period with interest. In many cases, the lenders may require the business to have a stellar credit score and financial background. They may also ask the borrowers to pledge collateral to secure the loan. It could be commercial real estate, medical equipment, or other high-value assets.
Banks usually have stringent eligibility requirements when it comes to business loans. This is why many businesses may opt for alternative lenders, who aren’t as strict as traditional lenders when it comes to eligibility. Alternative lenders may work with companies with poor credit scores, such as startups, and can fund businesses in as quick as 24 hours. However, alternative loans usually come with lower loan amounts and higher interest rates than traditional bank lenders.
Venture capitalists are usually bank subsidiaries or organizations composed of wealthy individuals looking to invest in high-potential businesses. It’s a form of equity financing wherein the investors provide capital in exchange for company equity. Venture capitalists usually fund businesses and startups with a high potential for success. Some may invest in a company and eventually acquire it when it becomes profitable in the future.
Also a form of equity financing, share capital lets the general public invest in businesses or projects. Investors, in turn, expect to earn a profit from their investments in the future.
When to Choose Business Financing
There are some instances where financing is a better choice than funding. For example, debt financing usually has faster funding times. Therefore, they’re a good fit for companies looking for quick access to additional capital. Some lenders can finance the business as fast as 24 hours after application. Loans could also be a better choice if you’re looking to address temporary cash flow interruptions or invest in top-notch medical equipment.
For interest-free financing, equity financing can also be a viable choice. However, it’s worth noting that if you go this path, the investors may demand a seat in your company and take part in decision-making processes, or business management in general. They will also be entitled to a portion of your company’s profits in the future.
Funding gives an organization the capital injection needed without the added cost or interest rate. It could come from the government or any private organizations (i.e., philanthropists, charitable organizations, etc.) in the form of business grants or donations. Unlike financing, business funding may be given for a particular purpose, such as startup costs or building medical facilities.
The only downside of business funding is that it can be tough to obtain. At the very least, you should be able to prove that your business lacks access to financial resources (i.e., loans). Additionally, you need to convince the sponsoring organization what makes your business worthy of the grant and highlight what makes you unique from other applicants.
Once you’re granted the funding, you’ll receive anywhere from $100 to $100,000 (or more), depending on the organization.
When to Choose Funding Over Financing?
If you’re confident that your company can meet the requirements set by the government or any organization for a particular business grant or donation, funding may be a suitable financial resource for you. Note that these types of funding are usually highly coveted, and there’s a chance that you’ll be competing against a bunch of other businesses for the donation or grant.
Funding is also a better choice if you cannot commit to the weekly or monthly repayments of loans. Interest rates can be high, especially if you’re applying from alternative lenders or your business is considered high risk. With funding, you won’t have to worry about setting aside a portion of your monthly profit for loan repayments.
The Bottom Line
Starting and expanding your medical practice can be daunting, especially when it comes to securing the much-needed capital. While there’s no such thing as the ‘best’ financing option for businesses, there is a ‘right’ one for your practice.
The key to choosing the right option is to consider your needs and long-term goals. Remember, the financial resource you choose should benefit your practice, not saddle you with more debt.
About the Author
Matthew Gillman is a business financing expert with more than a decade of experience in commercial lending. He is the founder and CEO of SMB Compass, a specialty finance company providing education and financing options for business owners.
Healthcare Business Today is a leading online publication that covers the business of healthcare. Our stories are written from those who are entrenched in this field and helping to shape the future of this industry. Healthcare Business Today offers readers access to fresh developments in health, medicine, science, and technology as well as the latest in patient news, with an emphasis on how these developments affect our lives.