In this column, we ll take a look specifically at the first cause and help you understand the financing sources available.
Financing a new small business can be one of the biggest hurdles that an aspiring entrepreneur faces. But it s not an insurmountable one. There are sources of start-up funds that are not as difficult to secure as many people assume.
The key is to find the right type of financing for your specific needs, determine exactly how much you need and what your responsibilities are to the lenders, and know how to use those funds wisely and how and when you will repay the funds.
A wrong move in any one of these areas could make the difference between success and failure for your small business.
Sources and types of small business financing fall into two broad categories. The money will be either equity or debt financing from institutional or informal sources.
With equity financing, you offer investors shares of your business in return for cash. Unlike with loans, you are not required to pay the money back, but these investors now own part of your business and will want a return on their investment.
Venture capitalists, angel investors, and stock offerings are types of equity financing. Equity, or capital, may also be contributed by the primary owner(s), from actual cash or collateral, like a home, land, certificates of deposit, life insurance cash value, etc. Equity may come from loans made to the owner(s) by their own family or friends.
Debt financing is a loan you pay back. Common sources include family and friends, home equity lines of credit, commercial bank loans, and bank loans backed by the U.S. Small Business Administration.
Personal credit cards and loans/liquidation of 401(k) accounts also can be sources but generally are not recommended as debt financing for new businesses because they mix personal indebtedness with business debt or usurp funds intended for one s retirement, and are, in the long run, very costly.
Other funding or cost-sharing options include partnerships, joint ventures, alliances, co-branding arrangements, and business incubators. Incubators rarely offer cash, but they provide crucial support in the form of free or reduced rent and business services.
Some small businesses receive a type of funding from suppliers and vendors in the form of special payment terms, discounts, or even direct loans. Suppliers want you to succeed because it means more business for them, so they are sometimes willing to help.
The SBA offers several financial assistance services for small businesses, including the popular 7(a) loan program. Most U.S. banks participate in the loan program, which is partially guaranteed by the SBA, issuing loans to small businesses to support their operations. Details about all SBA loan programs and other helpful information for structuring a financing strategy may be found at www.sba.gov/services/financialassistance.
In March, the SBA implemented two key provisions of the Recovery Act, raising the guaranty on 7(a) loans to 90 percent and temporarily eliminating fees for borrowers. Since then, the agency has experienced an increase of more than 25 percent in average weekly 7(a) loan volume, and new SBA loans have been made by nearly 450 lenders who had not made loans since last October.
You can apply for a loan by talking to a local SBA-participating lender. Once SBA receives a complete application package from your lender, the federal agency typically responds to the lender within a few business days. Such loan programs are available for most sound business purposes, including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation, and new construction), leasehold improvements, and debt refinancing (under special conditions).