Small Business Funding Options – Equity or Debt

Angels, VCs, bootstrapping loans from banks and alternative lenders

  Although bank loans are typically the first form of financing most new business owners think of, they are not the only way to fund your startup. Here’s an overview of your options.

TYPES OF FINANCING
EQUITY	DEBT
Signifies ownership and includes:	Does not signify ownership; it is borrowed money that must be paid back, and includes:
Personal savings	Loans from banks and credit unions (typically guaranteed by the SBA)
Investments from family and friends	Community Express Micro Loans
Partners’ contributions	Credit cards (not recommended)
Profits retained in the business

SIX TRADITIONAL FORMS OF FINANCING 1.   Partners: If you don’t have adequate capital yourself, consider taking on a business partner who can put money into your startup. 2.   Friends and family: This can be in the form of debt (a loan) or equity (giving the friend or family member ownership in the business in return for their investment). 3.   Loans: These could be from banks or credit unions and could include home equity loans. 4.   Credit cards: If you pay off the balance in full every month, credit cards can work, but if you don’t, this method of financing can become expensive very quickly. 5.   Sale of capital stock: Depending on the legal form of your business, you may be able to raise capital by selling stock. Be aware this means giving up some ownership. 6.   Grants: For most for-profit businesses, grants are not available. If you are starting a nonprofit organization, however, grants may be an option. (These are not readily available) TIP: As a rule of thumb, banks want to see annual “free cash flow” equal to 1.25 times annual debt service requirements. (Debt service means principal plus interest payments.) SIX OTHER FORMS OF FINANCING 1.   SBA guaranteed loans: These loans are made by banks, but a percentage of the loan is guaranteed by the Small Business Administration, making banks more willing to take a risk on your business. 2.   Department of community and economic development: Local economic development programs may offer financing assistance. 3.   Department of agriculture and rural development service: If you are located in a rural area or starting an agricultural-related business, there may be special loan programs available to help you. The SBA also has loans targeting rural entrepreneurs. 4.   Angel investors: Angels are individual investors, often former entrepreneurs, who invest in promising companies. They may form angel groups and invest together. 5.   Venture capitalists: Venture capital companies invest in companies that have potential for high growth and a rapid return on investment. They often focus on tech companies and seek large investment opportunities with multiple rounds of funding. 6.   Peer-to-peer loans: At sites such as Prosper.com (www.prosper.com) or Lending Club (www.lendingclub.com), individuals can connect to ask for and lend each other money. Next- FINANCING FROM THE BALANCE SHEET