Finding the right financing or finding ANY financing for that matter is one of the most difficult aspects of starting and building a solid small business. You may have a great business plan and be a talented business person, but finding financing is another matter.
Business owners often start with too little money. It is one of the most common reasons that new businesses don’t make it. Adequate financing and managing the money is crucial in order for your business to grow and thrive.
Sources and types of small business funding fall into a few broad categories. It will either be debt or equity financing from family and friends, a bank, venture capital, angel investors or alternative lenders. Debt financing is a loan that you pay back. Common sources include: family and friends, personal credit cards(not recommended), home equity lines of credit, commercial bank loans and bank loans guaranteed by the Small Business Administration (SBA).
With equity financing, you offer investors shares of your business in return for cash. Unlike loans, you are not required to pay the money back, but these investors now own a part of your business and will want a return on their investment. Venture capitalists work this way, and stock offerings are a type of equity financing.
Businesses can also receive a type of funding from vendors and suppliers in the form of special payment terms, discounts, direct loans or leasing options. Suppliers and vendors want you to succeed and often times are willing to help. Don’t be afraid to ask.
Other funding or cost sharing options include partnerships, joint ventures, and co-branding arrangements. Partnerships are two or more people who plan to create a business together, a joint venture is when two or more firms pool their resources and create a jointly owned organization. Co-branding is a relationship between two or more firms that promote each other.
The SBA website has an excellent section on financing that includes helpful advice on funding basics, estimating costs, personal vs. business loans, eligibility standards, steps to successful borrowing and lists of small business lenders. For details on all SBA programs, visit www.sba.gov/financing
Pick a financing structure that works best for your business and make sure that everyone involved understands it. Always be clear on whether the loan involves an ownership stake in your business or whether it is a simple debt to repay. And be clear about the payment terms.
To legally seal the deal, use a document such as a “Promissory Note.” It is crucial to put the terms of your borrowing agreement into a proper legal form. You can find the downloadable legal documents that you need at www.findforms.com. Self help legal publisher Nolo also offers loan forms and related information at www.nolo.com.
However, we always advise that you contact an attorney, who specializes in corporate and contract law to advise you. Understand the basics and then always let the expert create the final document that will protect you and the investor.
To learn more about financing your small business, contact SCORE- Counselors to America’s Small Business and take advantage of the business resources available to you.