A big challenge for most new small businesses is finding financing to enable them to grow into the company they want to be. The goal of most businesses is to grow, whether solely make more money or simply to accomplish their mission on a bigger scale. This is often a tough challenge, and getting tougher. In this article we’ll explore the types of financing that may be available and what the advantages of each type may be. In later articles we’ll explore the specifics of some of the more promising sources of funds and how to position your company to acquire that funding.
Financing will generally be in one of two forms, debt or equity. Debt will usually be in the form of a loan from a financial institution such as a bank or other individual/entity. Equity can be from a venture or angel capital fund or it could come from an individual as well. It will not come from you corner bank, however.
Let’s take a look at different types of debt/loans that you may obtain and where they will come:
Operating / Working Capital Loan – this is a loan that provides the liquidity to buy such things as inventory, advertising, general expenses such as salaries, office supplies, etc. This type of loan is needed because even though a business may be profitable, its capital may be tied up in other parts of the business, such as real estate or plant and equipment.
Capital Loans for real estate or equipment. The equipment could be anything from computers to manufacturing equipment. Loans for this purpose will generally require that the purchased property are pledged as collateral for the given loan.
Factoring loans – these are loans made to provide you with immediate access to your sales/revenue funds, with the loan made with accounts receivables used as collateral.
Loans to purchase existing businesses/franchises. As stated, they are loans to purchase business from other owners or to purchase the rights to conduct business in a certain location or manner with an existing model from a franchiser, such as McDonalds, for example.
Keep in mind that any of these loans will likely only be made based on the creditworthiness and possibly collateral of either the company, if its finances and track record are adequate, or of the owners. Many small business owners use their own capital to start them. They may use their own personal credit such as a home equity line or a second mortgage on their home, to raise funds for their business. Small business terms tend to be from two to ten years.
You can borrow the money from your own retirement account. If you have a 401k you can usually borrow up to 50% from your own account to use for any purpose – with up to five-year term to pay it back. However, you will need to pay it all back at once if you leave your job - a big hitch since you probably intend to be in your business full time. A better option may be to start a trust that allows you to transfer 50% of your 401k into the trust. It in turn invests in your business. No IRS penalties or payback into the 401k are necessary. Of course, you must be willing to risk your own retirement money in your business with all these 401k options.
What institutions make these loans? These days there have been so many combinations of different bank types and rule changes concerning the types of loans they may make, that you could get these loans from a number of different sources. Your local savings and loan institution, commercial banks, finance companies, and wealthy individuals are all possibilities. Credit Unions may also be a good inexpensive source of home equity type financing.
Small Business Financing. Types and Sources of Financing. Where to look based on the stage of your business. Part One.
Have Questions? Our consultants are available to help you with any financial question. We can also provide in-depth consultation concerning any financial issue facing you. We can help. Please contact: Best-Financial-Advice.com
Have Questions? Our consultants are available to help in-depth consultation concerning any financial issue facing you. We can help. Please contact: Best-Financial-Advice.com
Have Questions? Our consultants are available to help you with any financial question. We can also provide in-depth consultation concerning any financial issue facing you. We can help. Please contact: Best-Financial-Advice.com