The challenge for many start-ups is funding their businesses to get it off the ground and moving forward. Adequate financing stands as one of the key obstacles to both starting and growing a company. According to the SBA (Small Business Association) Office of Advocacy, small businesses seek financing for four primary reasons:
1) Starting a business
2) Purchasing inventory
3) Expanding the business
4) Strengthening the business
Understanding what types of financing is available is a good first step in figuring that out. So, what approach to funding will best suit the intent and needs of your small business?
There are two major categories of financing — debt and equity — but other options exist as well.
This involves borrowing money that you must repay (usually with interest) over a period of time. Generally, some or possibly, all assets of your business will be used to secure these loans. To protect them from default on a loan, lenders commonly require borrowers to personally guarantee repayment (i.e., to have a sufficient personal interest at stake).
Banks have been the major source of small business debt financing, but some have become more reluctant to offer long-term loans to smaller companies because of the risk involved. Fortunately, the Small Business Administration’s SBA 7(a) program has helped fill the void by encouraging banks to issue long-term loans to small businesses unable to get financing on reasonable terms through conventional lending sources.
With equity financing (or equity capital), a small business raises money by offering shares of ownership in the business. Investors’ equity investments give them ownership stakes in the business and allow them to share in the company’s proﬁts.
Equity capital may come from a variety of sources—such as your own personal savings, your life insurance policy, family, friends, employees, customers, government grants, venture capitalists, or angel investors.
What an entrepreneur must understand is that equity investors will naturally expect to get a return on their investments. Some might also require that they have a hand in your company’s decision-making. This is a consideration that may affect the day-to-day operation of a business and should be entered into with a clear understanding of how this will work.
Other Funding Options
These other financing and cost-sharing options also exist.
- Joint ventures
And an entrepreneur might also consider researching business incubators. While they typically don’t offer cash, they do provide some combination of valuable support in the way of free or discounted administrative services, an affordable workspace, shared office equipment, and even management guidance.
For those seeking funding to start or grow a small business, a ready resource is at hand. Reach out to your Northern Arizona SCORE chapter for guidance. Northern Arizona SCORE not only offers mentors who have vast expertise in a variety of aspects of business, but this chapter has also built partnerships with a number of local businesses. They can help guide you to locater resources that might best fit your financing needs.
Also, check out the free Financing For Small Businesses e-learning course on the SBA website; https://www.sba.gov/tools/sba-learning-center/training/financing-options-small-businesses.