The best to place to start looking for small business finance is with the SBA. They have all kinds of financial assistance and grant programs for small business owners. Assuming there's a need for financing from the commercial market outside of the SBA's purview, outlined herein are a few basics about the options available to small business owners.
The choices begin with either debt or equity financing. Drill down further, and there are all kinds of further selections within each of these choices, and any one could be suitable. The most suitable choice will ultimately depend on which industry the business falls under, the type of business (service, manufacturing, retail, etc.) and its age and cash flow situation. The owner's credit rating/history will also be an important issue.
Debt finance is a bond, loan or a line of credit from a lender. It could also be as something as simple as an IOU. This works best when there's a specific project involved and clear timelines are provided, so that the lender and borrower can agree on a repayment schedule. Some kind of security or collateral is often mandatory.
The owner's credit rating and history will have a big impact on the ability to secure small business financing. The business also has to have a good enough cash flow (or projected cash flow) in order to meet the repayment schedule. It is important for the owner to do some business planning to figure out a feasible repayment period based on cash flow.
With equity financing, the owner offers the investor part ownership in return for cash. It has certain disadvantages such as loss of control, since the investor would like to a part of the decision making process. But unlike small business loans, equity investments don't need to be paid back with interest, so it makes it easier to run the business.
Equity investments are suitable when the requirement is not for a specific project, but for long term growth of the business in general. Equity investors need higher returns, so they're willing to stay put until such time as the business has grown and is doing well. It also means that the owner might never regain full control of the business again.
Equity investment can in the form of individual investments made on a personal basis by the owner, friends, family, colleagues or angel investors. It could be funding provided by a venture capital firm. Equity financing is more focused on the success potential of the project and does not require the kind of guarantees or collateral required for debt financing.
As mentioned above, the decision on debt vs. Equity will depend on the type of business, its current situation and the owner's credibility. Too much debt is not good for the business, and neither is losing control entirely to equity investors. The right balance needs to be found, and this debt-equity ratio is different for different kinds of industries.
It is also helpful to consider all the options beyond these basic choices. For example, there's a choice between buying equipment outright with the finance and applying specifically for equipment lease funding. The latter doesn't burden the business with debt but still leaves the door open for a future purchase. To know more about all the choices and possibilities associated with small business finance when conducting your business planning, business owners should start by consulting a lawyer, read a trusted lender.
The choices begin with either debt or equity financing. Drill down further, and there are all kinds of further selections within each of these choices, and any one could be suitable. The most suitable choice will ultimately depend on which industry the business falls under, the type of business (service, manufacturing, retail, etc.) and its age and cash flow situation. The owner's credit rating/history will also be an important issue.
Debt finance is a bond, loan or a line of credit from a lender. It could also be as something as simple as an IOU. This works best when there's a specific project involved and clear timelines are provided, so that the lender and borrower can agree on a repayment schedule. Some kind of security or collateral is often mandatory.
The owner's credit rating and history will have a big impact on the ability to secure small business financing. The business also has to have a good enough cash flow (or projected cash flow) in order to meet the repayment schedule. It is important for the owner to do some business planning to figure out a feasible repayment period based on cash flow.
With equity financing, the owner offers the investor part ownership in return for cash. It has certain disadvantages such as loss of control, since the investor would like to a part of the decision making process. But unlike small business loans, equity investments don't need to be paid back with interest, so it makes it easier to run the business.
Equity investments are suitable when the requirement is not for a specific project, but for long term growth of the business in general. Equity investors need higher returns, so they're willing to stay put until such time as the business has grown and is doing well. It also means that the owner might never regain full control of the business again.
Equity investment can in the form of individual investments made on a personal basis by the owner, friends, family, colleagues or angel investors. It could be funding provided by a venture capital firm. Equity financing is more focused on the success potential of the project and does not require the kind of guarantees or collateral required for debt financing.
As mentioned above, the decision on debt vs. Equity will depend on the type of business, its current situation and the owner's credibility. Too much debt is not good for the business, and neither is losing control entirely to equity investors. The right balance needs to be found, and this debt-equity ratio is different for different kinds of industries.
It is also helpful to consider all the options beyond these basic choices. For example, there's a choice between buying equipment outright with the finance and applying specifically for equipment lease funding. The latter doesn't burden the business with debt but still leaves the door open for a future purchase. To know more about all the choices and possibilities associated with small business finance when conducting your business planning, business owners should start by consulting a lawyer, read a trusted lender.
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