When looking to fund your business, there are many options available. Depending on what type of business you are operating or looking to start, the amount you need and the reason for your funding will likely determine the type of financing you want to obtain. In future posts, we will look more closely into the most common type of financing businesses obtain through the SBA. However, to give you a general idea of the different financing options available, here is a brief overview:
Friends and Family
One of the fastest ways to obtain funding is by asking your friends and family. There are many different ways to structure a deal with friends and family, which can include low interest rates, equity compensation and even a pay-me-when-you-can attitude. However, this type of funding can often cause stress on relationships, and many family members may believe it comes with the right to have a say in your business. Obviously, you know your family best, and it is often recommended that you manage expectations and the possibility of failure right from the start.
Here is some additional reading about friends and family financing:
How to Borrow from Family and Friends -- http://guides.wsj.com/small-business/funding/how-to-borrow-from-family-and-friends/
6 Tips for Borrowing Startup Funds from Friends or Family -- http://www.sba.gov/community/blogs/community-blogs/small-business-cents/6-tips-borrowing-startup-funds-friends-or-famil
These loans come from private lenders and are not guaranteed by the government. The terms of these types of loans vary, but usually they are for already established businesses that have good credit. Additionally, these loans are usually for larger amounts, and the amount being borrowed plus what it is used for often determines the structure of the loan.
Learn more at https://www.boefly.com/conventional-loan
Venture Capital and Angel Investors:
Venture capital (VC) is a type of equity financing that addresses the funding needs of entrepreneurial companies that -- for reasons of size, assets, and stage of development -- cannot seek capital from more traditional sources, such as public markets and banks. Venture capital investments are generally made as cash in exchange for shares and an active role in the invested company.
Business “angels” are high-net-worth individual investors who seek high returns through private investments in start-up companies. Private investors generally are a diverse and dispersed population who made their wealth through a variety of sources. But the typical business angels are often former entrepreneurs or executives who cashed out and retired early from ventures that they started and grew into successful businesses.
VC and angel funding are usually for high-growth startups that have the potential of generating a large return on investment through either an Initial Public Offering (IPO) or through a merger or acquisition of the company.
Learn more at http://www.sba.gov/content/venture-capital#
There are many different types of loan programs that the SBA offers. While the U.S. Small Business Administration does not make direct loans to small businesses, it does establish guidelines for lenders, community development organizations, and microlending institutions. When a business applies for an SBA loan, it is actually applying for a commercial loan, usually through a bank or financial institution. The role of the SBA is to structure requirements for lenders, as well as establish an SBA guaranty that the loan will be repaid. The percentage of the loans that the SBA will guarantee depends on the type of loan a business applies for. Depending on current economic conditions, the government will alter its fiscal policy and priorities which can affect changes and the types of programs available. It is important to speak with your local SBA about the most current policies and programs.
In upcoming posts we will dive a little deeper into the specifics of the different types of loans the SBA offers. These loans include the Basic 7(a), SBA Express, Patriot Express, Small Loan Advantage, Community Advantage, CDC/504 Loans, Disaster Loans, and Microloans.
Above are some of the more common avenues for small businesses to finance their business; however, we only scratched the surface. There are many other options to include crowdfunding, equipment loans, lines of credit, etc. Again it is often dependent on the type, stage and amount of financing your business needs. Do your research, see what’s available and choose the type of financing that best suits your business.