Small Business Financing, Part Two:

You could apply at a local savings or commercial
bank for a government guaranteed loan such as Small
Business Administration, or SBA loan. You would
generally apply to the same bank as a standard loan,
as many banks will make these loans if you qualify.
However, there is some additional paperwork and
rules with which you and the bank must comply.

The primary loan program that the SBA guarantees is
called the 7a loan. These loans can be made for up to
a million dollars, with 75% guaranteed by the
government. The maximum term is up to six years.
The SBA also has a “microloan” for very small
businesses, where up to $35,000 can be borrowed.
Not as many banks aggressively pursue this
business, however, since they the loans are less
profitable for them.

Equity Financing

Equity Financing is where investors provide your
business with funds/capital in exchange for a
percentage ownership of your business. Here we are
talking about private market investment by an
investment fund or individual. There will be a series of
articles following this one discussing the key issues
involved in this type of financing in more depth. In
short however, a typical transaction essentially
involves the exchange of X amount of capital for Y%
ownership of your company. From the original owners
perspective, the key is to give away the least percent
amount of your business for the most amount of
money. You must also be comfortable with giving up
partial control of your business.              

Broadly speaking, there are two stages of equity
investing. The first is the investment by so-called
Angel Investors. The primary characteristic of this type
of investing (also known as seed capital) is simply
that it is funding a company in the very early stages of
development. It may even be capital for a company
that has not been formed yet. It also tends to be for
relatively small amounts of money in investment terms,
anywhere from $50,000 to several million.

There can be multiple rounds of seed capital. You
may get $200K in the first stage, $750K in the second
and $2.0M in the third. A key issue is what percent of
the business are you giving up at each stage, and
how much potential and growth the business is
estimated to have at each of these key junctures.  

Once your company has grown and is or needs to be
capitalized in the million dollar plus range, you may
want the services of venture capital firms to foster
significantly bigger growth. Venture capital firms, or
VCs as they are  known, are investment firms
specifically formed to invest capital funds in growing
firms. Their goal is to identify industries and
companies that have oversized growth potential, so
that they can invest and reap superior returns from the
later profits or resale of these companies.

These VC firms  have the potential to tap greater
amounts of capital, from several million on up, that can
bring your business up to the next level. Since
investing in and helping businesses grow is their
business, they may have industry contacts and
significant amounts of organizational expertise that
can benefit a company in this stage of development.
See future articles for more in depth information
concerning VCs and how to gain financing through

Click here to go to Part One - Small Business

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Financing for Small Business. Types and
Sources of Financing. Where to look
based on the stage of your business.   
Part Two.
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