Funding sources
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Self-financing
The owner can finance it himself or herself through savings or other available personal resources.
Loans
Bank loans
The owner can also raise capital for a business using an equity loan on his home or other assets he or she may own. Many owners seek a bank loan in the name of their business, however banks will usually insist on a personal guarantee by the business owner. In the United States, the Small Business Administration (SBA) runs several loan programs that may help a small business secure loans. In these programs, the SBA guarantees a portion of the loan to the issuing bank and thus relieves the bank of some of the risk of extending the loan to a small business.
Credit card debt
Financing a business with credit card debt is usually a poor choice, the interest rate on credit cards is often several times the rate that would be paid on a line of credit or bank loan.
Micro loans
There are thousands of alternative small business loan programs available but can be difficult to find. These programs include local micro loans, revolving loans, gap financing, incentive programs, loan guarantees and more. Funding for these programs comes from a variety of federal, state and local sources including; the Small Business Administration (SBA), U.S Department of Agriculture - Rural Development (USDA), Economic Development Administration (EDA), etc, and are given to economic development agencies, not-for-profits and other groups to increase economic opportunities and increase/retain jobs.
Unlike commercial lenders, these programs are focused on job creation and retention, so they typically don't have the same strict lending and credit requirements that commercial banks require and these funds are often offered at a lower interest rate.
People-to-people lending
While borrowing from friends and family for business has been long-practiced, new services and markets to respond to the needs of "social finance" or "people-to-people" lending are emerging. In some cases, these online services provide a marketplace between lenders and borrowers.
Investment capital
The owner can finance a business by getting investors to purchase stock in the company (although there would be legal problems if it were offered to the general public). A partnership can be formed or perhaps a venture capitalist could provide funds if the business venture plans were sound enough. There are some early stage investors called angel investors who invest in startup companies. Friends and relatives can also loan money. The owner should realize that if anyone else participates in the venture some elements of control will be lost. All investors should be aware of the risks involved when one invests in a startup business.
Grants
In certain circumstances and for small businesses in specific industries and niches, sources of funding may be available from governmental or private sources in the form of grants. Unlike a loan, these funds are typically not paid back to the source. However, grants come with requirements attached. These requirements can range from research results, reports or specific products and services. Grants can be available from a wide array of sources including federal government agencies, state government agencies, or grants from educational or corporate institutions and private foundations.
See Also
External Links
- U.S. Small Business Administration
- SBA loan program website (sba.gov)
- SBA investment programs website (sba.gov)
- SBA bonding programs website (sba.gov)
