Financing Options
As you look for sources of capital to fund your business, know that you have a variety of options.
Contrary to popular belief, it is not a matter of venture-backed funding or nothing. In fact, according to Professor Jeff Cornwall of Belmont University, less than 1% of business ever receive venture capital.
Instead, many entrepreneurs choose to “bootstrap,” relying on personal savings, loans from family and friends, credit card debt, and bank loans. The following section discusses the many options available to you and your business.
Self-Funding
Can be accomplished in a variety for ways:
Personal Savings
Entrepreneur funds initial capital investment and working capital out of pocket
- Works best for businesses and industries that are not capital intensive
- Puts the entrepreneur’s personal finances at risk
Personal Loans
Entrepreneur borrows capital from other individuals, usually family and friends
- Works best for businesses and industries that are not capital intensive
- Loans may lack formal structure and safeguards that are present in other types of loans
Credit Card Debt
Entrepreneur borrows funds through commercially available credit cards
- Freedom from strong debt covenants and control mechanisms
- Interest rates typically higher than other types of loans
- Can get out of hand very quickly if the entrepreneur is not careful or if the business is slow to take off
Loans Against Personal Collateral
Entrepreneur borrows funds against personal assets, such as a home mortgage
- Puts the entrepreneur’s personal finances at risk
Long Term Debt
Entrepreneur borrows funds in the form of a loan through a formal institution
- Loans are paid back in equal installments over the life of the loan
- Sources include: commercial banks, government sponsored loan programs, small business investment companies, and private lenders
Lines of Credit
Entrepreneur obtains short-term funds in order to maintain positive cash flow
- As funds are generated in the business cycle, the loan is repaid
- As funds are used the “credit line” is reduced; when payments are made the line is replenished
- No interest is accrued until the funds are withdrawn, but the line is immediately available for the company’s cash flow needs
Letters of Credit
Entrepreneur obtains a guarantee from a bank that a specific obligation will be honored by the bank if the borrower fails to pay
- Can be useful when dealing with new vendors who may not be assured of a company’s credit worthiness
- The bank offers a letter of credit as an assurance to the vendor of payment
- Credit requirements for a line of credit and a letter of credit are similar
Asset Based Funding
Lender accepts collateral of the assets of a company in exchange for a loan
- Most loans are financed against accounts receivable and less often against inventory
- May be the best for companies in turnaround where bank loans may not be available
Venture Capital
Firms offer capital in exchange for equity in a company
- Most appropriate for high-growth, scalable business
- Investor typically demand returns in the range of 15 to 30%
Other Options
- Loan Workouts
- Floor Planning
- Small Company Offering Registration (SCOR)
Best of the Web
AllBusiness.com provides guidance on small business financing options.
Entrepreneur.com provides a series of articles on financing options.
