Financing a small business start-up is one of the biggest hurdles that an aspiring entrepreneur faces. Itís not an insurmountable hurdle. There are resources of start-up funds that are not as difficult to secure as many people assume.
The key is to find the right type of financing for your specific needs. Determine exactly how much you need and what your responsibilities are to the lenders. You have to know how to use those funds wisely. A wrong move in any of these areas could make the difference between success and failure for your small business.
Sources and types of small business financing fall into a few broad categories. It will either be debt or equity financing from institutional or informal sources. Debt financing is a loan you pay back. Common sources include family and friends, personal credit cards, home equity lines of credit, commercial bank loans and bank loans backed by the U.S. Small Business Administration.
Some small businesses also receive a type of funding from suppliers and vendors in the form of special payment terms, discounts or even direct loans. Suppliers want you to succeed because it means more business for them, so they are willing to help.
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 the investors now own 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.
Other funding or cost-sharing options include partnerships, joint ventures, alliances, co-branding arrangements and business incubators. Incubators rarely offer cash, but they provide crucial support in the form of free or reduced rent and business services.
The SBA offers several financial services for small businesses, including its popular 7(a) Loan Program. Most U.S. banks participate in 7(a), which provides loans on a guaranty basis. Lenders will structure their loans based on the SBAís requirements.
Details about all SBA loan programs and other helpful information for structuring a financing strategy may be found at www.sba.gov/services/financialassistance.