Financing Your Small Business

Financing your small business can be one of the biggest hurdles for a small business owner.  Whether you desire to open a chain of restaurants or an Internet-only business, capital funding is required to fund your dreams.  Here we will explore the different types of funding available to you:

Debt financing includes any money you will pay back.  It does not require you to give up equity in your company and can be a good choice for entrepreneurs who have not been able to attract the attention of investors.  This type of financing usually requires personal collateral and will require you to pay interest.

  • Loans – Loans are available from a variety of sources, including local banks, the Small Business Administration and non-profits.  Requirements vary, but they are usually credit-based and will require you to pay interest.  Some economic development organization microloans may take into account character as well.

Equity financing requires you to give up a portion of your ownership to investors in exchange for their money.

  • Friends and Family – For most business owners, this is the first stop when looking for funding.  Your friends and family members know your character, and the process to get money is usually much shorter than other methods.  Even better, most will not request a stake in your business in exchange for funding.  Even though you know these lenders personally, make sure you get all agreements in writing.
  • Angel Investors – These are high-worth individuals or groups of people who exchange their industry expertise for a portion of your company’s equity.  These investors can be hard to find, and some only focus on certain sectors.  An Internet search may uncover the angel investors in your industry.
  • Venture Capitalists – These companies are usually interested in established companies or start-ups that will quickly be poised for sale or public offering.  There are usually high standards for receiving this type of funding, and you must be willing to give up a portion of your control.

Other types of funding:

  • Business Plan Competitions – Many are run by local business schools and require you to partner with at least one student to enter the competition.  Winning could mean networking opportunities, funding and ongoing support.
  • Government Grants – Though it is a popular belief that the federal government provides small business grants, money that you do not have to pay back, it is not entirely true.  Most grants go to local non-profits that help start-ups rather than the businesses themselves.  Some states do, however, provide grants for special industries, such as technology and “green” sectors.  Check your state’s requirements for more information.

As you can see, there are a variety of ways to get financing for your start-up.  An accountant or financial manager can help you decide which type of funding would be best for you.  For more information on business financing, including sample promissory notes that can be used for family and friend loans, download the SCORE Financing Guide: http://www.score.org/pdf/FinancingGuide.pdf.

This article, by Dequiana Jackson, was originally published in Gemini Magazine.

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About Dequiana Jackson

Dequiana Jackson, CEO of Inspired Marketing, Inc., is a small business marketing coach who teaches women entrepreneurs how to monetize their message so they can make more money from their expertise. Dequiana is the author of Know Your Business: How to Attract Ideal Clients & Sell More and runs the award-winning blog, Entrepreneur-Resources.net.

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13 comments

  1. As someone who works with lenders extensively, I thought this was a pretty good article and covered the general sources of financing small business. In regards to the loan option, its a HUGE misconception that the SBA is a direct lender. In many cases, they will guarantee a loan, but at the end of the day, the lending criteria is still set by the bank (no matter if the SBA guarantees 90% of the loan). Its not much of an incentive to a bank, whose ultimate job is to ensure that they are paid back.

    I work for a non profit that is also a CDFI, a community development finance institution, and you would be amazed that people think that since we are a non profit, our loan program is like charity. The organization is Chicago Community Ventures (CCV), and our primary clients are women, minorities and businesses in low to moderate income areas of Chicago.

    People, know your credit score, understand cash flow and more importantly, understand how you will pay the money back (and be able to convey that to the lender).

    One source that people may (or may not) be aware of is Sam’s Club. They have partnered with Superior Financial to offer the Community Express/SOHO loan, under the SBA’s 7a program. Credit criteria is 680 – 700, loan amounts range from 5000 – 25k.

    Another source is a Individual Development Account. Its a matching program, but you have to meet income requirements. For every $1 you save, you will receive between $2- $4 (there is a limit to the savings). Bethel New Life is the only program in Chicago that I currently know is funded. Funds can be used for very limited things, but starting/expanding a business is one acceptable use of funds.

    If anyone has any questions about anything mentioned above, feel free to contact me or check out CCV’s blog http://www.chiventures.typepad.com

  2. Well I found this on Digg, and I like it so I dugg it!

  3. Well I found this on Digg, and I like it so I dugg it!

  4. @ Christyn – Thanks for your perspective and for sharing the additional funding sources. You mentioned that Sam’s Club has a credit score requirement. Do you know if the IDA programs traditionally have credit requirements as well? Even though the programs may be limited, they look like good options for small business owners who wouldn’t qualify for a traditional loan. It can also promote the idea of saving for something important vs. spending everything that’s earned. Thanks again!

  5. As most business owners will come to know, obtaining a small business loan can be a trying ordeal. Learn what you need to know about getting a small business loan for your business.

    • You make a great point. Lenders are making the guidelines even more stringent. Unless a business owner knows that he or she will meet the requirements, an alternate source of funding should be sought out: personal finances, family and friends, business competitions and more.

  6. Some companies offer loans for individuals who wants to start a business and they make great deals.
    cash out financing Bergen NJ´s last blog post ..Spotlight on Structuring: Nova Bridge Capital

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