Financing Options for Businesses – Which Type of Financing Is Right for Your Business?
There is good news for small business owners. Small business lending rose 18% during the period from November 2010 to November 2011. Congress is also most likely to pass the JOBS (Jump-start Our Business Start-ups) Act this year. This will make it easier for small businesses and start-ups to raise capital. The new law will be for businesses with revenue of less than $1 billion. The more traditional lenders are banks, credit unions, finance companies, the SBA, state and local government agencies. Friends and family could also loan you money minus the red tape and paperwork. If you are open to accept financiers as business partners or shareholders, you can get equity financing from individuals or institutions. SmallBizTrends.com lists other financing options for business owners.
Debt Financing: Institutional Lending
You can apply to many sources for debt financing, including banks, credit unions, savings and loans, commercial finance companies, and the U.S.Administration (SBA). State and local governments also offer programs to assist in the growth of small businesses.
Debt financing is attractive toowners, since it can be easier to obtain than equity financing and you don’t have to give up any equity in your company. On the downside, you’ll need to pay back your loan with interest, and may need to provide personal collateral (such as your home) to guarantee the business loan.
Debt Financing: Friends & Family
Many entrepreneurs borrow debt financing from family members and friends. This funding typically comes in small amounts without a lot of hassle or paperwork.
If you’re involved in technology, you can consider applying for competitive grants from the U.S. government’sInnovation Research (SBIR) program. This program provides more than $2 billion annually from 11 Federal agencies (such as the NIH and USDA) to small businesses to spur R&D and high-tech innovation. SBIRs are highly competitive. In addition, there are numerous state, regional, and minority grant opportunities available.
There are three common types of equity financing:
- Family and friends: in this arrangement, a family member or friend will provide you with capital in exchange for an appropriate stake (i.e. stock) in your company.
- Angel Investors: these are high net worth private investors. In addition to money, angels often impart their business wisdom, guidance, and networking opportunities.
- Venture Capitalists (VCs): They invest in companies with the expansion potential to grow into major businesses with high profits for shareholders. As a result, they look for young companies that are beyond the startup phase, are ‘fast growth’ companies, and are willing to go public in the near future (approx. 3-5 years). …
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