Sources of Small Business Financing

You’ve finally decided to start your dream business. With a compelling vision, a solid business plan, and a supportive network of friends and family, your potential is limitless. This article focuses on the different sources of financing from lenders to credit cards.

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Equity vs. Debt Financing

Equity financing or debt financing are common ways entrepreneurs get money for their small businesses. Equity financing means you sell stock in your company to a buyer with an ownership interest. Debt financing is a loan. You are in debt to the lender and owe that person, business, or bank the amount you borrowed.

Common Financing Sources

Here are common equity and debt financing sources for small businesses that range from bank loans to credit cards.

Yourself

Many startups find financing from their owners by using savings or cashing out 401Ks. A home equity line of credit or selling personal assets are other ways to finance your business. Borrowing against your bonds, mutual funds, real estate, or stocks is another option. The money you contribute is equity, or you can create a personal loan to the business.

Family and Friends

Your family, relatives, and friends may financing options for your small business. They can lend you money, or ask for an equity stake in your company.

Small Business Administration

The Small Business Administration (SBA) offers several loan programs to small businesses. Its 7(a) Loan Guaranty Program provides loans to small businesses that cannot obtain financing from traditional banks.

Banks

Many business owners receive loans from banks. However, banks are usually the most challenging place for a startup business to find money because banks like to see a company’s history of making money. They want to be sure that your company will be able to repay the loan. A good business plan and available personal assets as collateral may entice a bank to offer you a loan.

Credit Cards

An often overlooked startup financing option is through your existing credit card. Most credit cards also offer a built-in line of credit. The interest rates are typically much higher than a traditional bank or SBA loan.

Leasing Companies

Leasing companies can lease your startup equipment such as computers, phone systems, and vehicles. Leasing lowers startup costs because you do not pay the full amount upfront.

Customers

You can ask for an advance from customers to pay for their products or services in full, so you have money to purchase products or inventory before the sale.

Trade Credit

You can request a trade credit from vendors and suppliers, who may sell to you on credit based on your reputation or credit score. This is an excellent source of financing for both startup companies and growing businesses.

Small Business Investment Centers

The SBA licenses and regulates Small Business Investment Centers (SBICs) which are owned by private and management firms. The SBICs provide small businesses with venture capital and startup financing.

Venture Capital Firms

Venture capitalists, sometimes called angel investors, provide funds to companies they believe have exceptional growth potential. Very few small businesses can obtain funding through venture capital firms.

Investment Banking Firms

Investment bankers”take companies public.”That means that the investment banker offers your company stock (an ownership interest) to the public. This option is generally only available to small businesses with a strong growth history and growth potential.

Private Placement

A private placement is an offer of stock (the stock gives the buyer an ownership interest in your company) or debt (you owe the holder of the debt instrument, much like a loan) to wealthy individuals or venture capitalists without going public.

Crowdfunding

Financing is available through crowdfunding, where you offer equity in exchange for funds. Be careful if you decide to crowdfund, as there are many rules and restrictions from advertising requirements to regulations on gathering funds.

Get Legal Help With Your Business Financing Efforts

Now that you have a grasp of the financing basics, it’s crucial to determine what funding option is best for your unique situation. Reach out to a small business attorney today to discuss the pros and cons of your options.

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