Financing a Small Business
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UPDATED: Nov 28, 2011
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There’s a common saying that goes, “It takes money to make money.” While most do not have access to large sums of cash before attempting to start a business, there are a few routes available to entrepreneurs who hope to establish the necessary funds required to make money.
Equity Financing or Debt Financing
The first decision a young business owner must make is what kind of financing he or she will use for starting and maintaining their small business. The two most viable options are equity financing or debt financing.
Equity financing allows small business owners to acquire money in exchange for shares in profit that the business will make. This allows a small business owner to obtain financing without incurring any debt.
Equity financing is usually only available through non-professional private investors—friends, family, employees, and customers. But there are those who call themselves venture capitalists, or professional equity financers, who may opt to fund an emerging small business. Venture capitalists are rare though and must be presented with good evidence that a business will succeed before they take the large risk of offering investment money.
When investors are not available, as common for most brand new business owners, debt financing usually proves to be the most viable option. Debt financing is the category that personal loans fall under: money that is lent to an individual or organization that must be paid back with interest.
Small business personal loans can come from a variety of sources. These sources usually include banks, credit unions, and the government. The Small Business Administration (SBA) is a government agency that guarantees loans on behalf of business owners. This alleviates some of the risk for lenders and encourages them to issue money to these small and growing businesses.
In addition to government guarantees, these personal loans are usually also secured by a company’s assets. Additionally, they often require a borrower’s personal guarantee in order to qualify. In the event of default, the company’s assets will be used as collateral, and if those assets do not satisfy the cost of the loan, the borrower will be pursued. This ensures the small business owner is serious about his endeavor, and justifies the lender’s risk of issuing money to a stranger with a dream.
Food For Thought
Before applying for a small business loan, borrowers need to be sure of their business plan, and they must be sure of their chance for success. To help owners with this decision, the SBA has offered a variety of questions to consider before taking out a personal loan for a small business:
- Can your business repay the loan?
- Can you repay the loan if your business fails?
- Does your business pay its bills?
- Are sales growing?
- Are profits increasing?
- Do you have strong competition?
- What does your business’s future look like?
These questions are meant to help a business owner determine their ability to pay back a loan. If one’s vision of the future is optimistic and they see their business growing, then a personal loan may be the perfect tool for jumpstarting their business’s growth and profit-making potential.