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Sources of Small Business Financing
Small businesses can get money through "equity financing" or "debt financing." Equity financing means that you sell stock in your company to a buyer, who then has an ownership interest in your company. Debt financing means a loan -- you owe the person who holds the debt (usually a promissory note) the amount borrowed. Here are the most common sources of equity and debt financing for small businesses.
- 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 company.
- Family and Friends. Mom, dad, relatives, and friends may have access to more cash than you do. They may be willing to lend you money, or they may be willing to take an equity stake in your company.
- Small Business Administration. The Small Business Administration (SBA) offers a number of loan programs to small businesses. The 7(a) Loan Guaranty Program is one of its primary programs. Through this program, the SBA provides loans to small businesses that are not able to 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 a lot of loans to small businesses. However, they are usually the hardest place for the start-up business 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 who is satisfactory to the lender), you may be able to qualify for a bank loan even if your business is a start-up business.
- Credit Cards. If you have a credit card, you have a built in line of credit. Although credit cards are one of the most costly ways to finance your company, they are routinely used as a source of funds for start-up businesses.
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