You have finally decided to open the business of your dreams, right in the neighborhood where you grew up. You have a great vision, a business plan, and supportive friends and family. Now you need financing for your small business. Go ahead to learn about the various aspects of financing and what your potential options might be.
Stock financing vs. debt financing
Small businesses can get money through “equity financing” or “debt financing.” Capital financing it means that you sell shares in your company to a buyer, who then has a stake in your company. Debt financing means a loan – you owe the person who owes the debt (usually a promissory note) the amount borrowed. These are the most common sources of equity and debt financing for small businesses.
Common sources of funding
You: Contributing your own money to your business is the easiest way to finance it. You can tap into your savings, use a home equity line of credit, or sell or borrow against a personal asset – including stocks, bonds, mutual funds, or real estate. You can contribute money as equity or make loans to your business.- Family and friends: Mom, dad, relatives, and friends may have access to more money than you. They may be willing to lend you money, or they may be willing to take an equity stake in your business.
- Small Business Administration: The Small Business Administration (SBA) offers a number of small business loan programs. The 7 (a) Loan Guarantee Program is one of its main programs. Through this program, the SBA provides loans to small businesses that cannot obtain financing on reasonable terms through normal lending channels. You can apply for these loans through your local participating lender (usually a bank).
- Banks: Banks make many loans to small businesses. However, they are usually the most difficult place for the new company to find money, because banks like to see that a company has a history of making money. The bank wants to be reasonably sure that your company will be able to repay the loan. If you have a good business plan and have personal assets that you can offer as collateral (or if you have a guarantor or cosigner that is satisfactory to the lender), you may be able to qualify for a bank loan, even if your business is a start-up company.
- Credit cards: If you have a credit card, you have a built-in line of credit. Although credit cards are one of the most expensive ways to finance your business, they are commonly used as a source of funds for new businesses.
- Financial leasing companies: Leasing companies are a way to finance computers, office equipment, phone systems, vehicles, and other equipment. Leasing can lower your upfront costs because you won’t have a large upfront cash outlay for the equipment.
- Customers: If you have existing customers, they may be willing to pay you upfront for your products. This allows you to use your money to buy products or inventory before the sale.
- Commercial credit: Sellers and suppliers are often willing to sell you on credit. This is a great source of funding for both startups and growing businesses.
- Small Business Investment Centers: Small Business Investment Centers (SBICs) are licensed and regulated by the SBA. SBICs are privately owned and managed investment firms that provide venture capital and seed funding to small businesses.
- Venture capital companies: Venture capitalists provide funds to companies that they believe have exceptional growth potential. Very few small businesses can obtain financing through venture capital firms.
- Investment Banking Companies: Investment bankers are “publicly traded.” This means that the investment bank offers the public shares (an ownership interest) in your company. This option is generally only available to small businesses that have a very strong growth history and great growth potential.
- Private Placement: A private placement is an offering of shares (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 being made public.
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