For many start-ups, funding their businesses stands as one of the key obstacles to getting their companies off the ground and moving forward. According to the SBA Office of Advocacy, small businesses seek financing for four primary reasons:
1) Starting a business
2) Purchasing inventory
3) Expanding the business
4) Strengthening the business
What approach to funding will best suit the intent and needs of your small business? Understanding what types of financing is available is a good first step in figuring that out.
There are two major categories of financing—debt and equity—and other options exist as well.
Debt Financing
This involves borrowing money that you must repay(usually with interest)over a period of time. Generally, some or all assets of your business will be used to secure the loans. To protect them from default on a loan, lenders commonly require borrowers to personally guarantee repayment (i.e., to have a sufficient personal interest at stake).
Banks have been the major source of small business debt financing, but some have become more reluctant to offer long-term loans to smaller companies because of the risk involved. Fortunately, the Small Business Administration’s SBA 7(a) program has helped fill the void by encouraging banks to issue long-term loans to small businesses unable to get financing on reasonable terms through conventional lending sources.
Equity Financing
With equity financing (or equity capital), a small business raises money by offering shares of ownership in the business. Investors’ equity investments give them ownership stakes in the business and allow them to share in the company’s profits.
Equity capital may come from a variety of sources—such as your own personal savings, your life insurance policy, family, friends, employees, customers, government grants, venture capitalists, or angel investors.
Equity investors will naturally expect to get a return on their investments. Some might also require that they have a hand in your company’s decision-making.
Other Funding Options
These other financing and cost-sharing options also exist.
- Partnerships
- Joint ventures
- Alliances
- Crowdfunding
And you might also consider researching business incubators. While they typically don’t offer cash, they do provide some combination of valuable support in the way of free or discounted administrative services, an affordable workspace, shared office equipment, and even management guidance.
If you’re looking for more information concerning small business financing, consider attending SCORE Central Oregon’s seminar on May 4 from 5:30-7:30pm at the downtown public library titled “Everything you wanted to know about small business financing but were afraid to ask.” Learn about small business financing from two local small business financing experts. Learn about what banks are looking for, what is crowd sourcing and what support is available from the State of Oregon.
Since 1964, SCORE “Mentors to America’s Small Business” has helped more than 9 million aspiring entrepreneurs and small business owners through mentoring and business workshops.
For more information contact Central Oregon SCORE at www.SCORECentraloregon.org or 541-316-0662
