Funding a Small Business: 7 Financing Sources to Consider

Bank loans, crowdfunding, venture capital, and more: entrepreneurs looking to start and grow their businesses have multiple options. In the end, however, there are only two kinds of money: debt, which is borrowed, and equity, which is traded for ownership of the company.

To help you determine which is right for your company, here’s a look at seven small business funding sources:

1.Traditional Bank Loans

“… be realistic – about your loan request, your company’s current financial situation, and the future of your business. Ask your banker how he feels about your credit and his ability to meet your credit expectations. Remember: Your bank most likely has money to lend, but its risk tolerance has been lowered due to the current economic and regulatory environment.” (Planning, Preparation Key to Securing Credit by McAfee & Taft)

2.Small Business Administration Loan Programs

“The [2010 Small Business] Jobs Act permanently increases the maximum loan size for legacy SBA loan programs, raising the maximum size for the 7(a) Loan Program and the CDC – 504 Loan Program from $2 million to $5 million, and the maximum 504 manufacturing related loan from $4 million to $5.5 million. In addition, the Jobs Act temporarily increases the maximum loan size for the SBA Express loan program from $350,000 to $1 million; the Express loan program is primarily used to fund working capital loans that small businesses use to purchase new inventory.” (The Small Business Jobs Act of 2010 – Loan Benefits to Small Businesses by Brad Hamilton)

3.Family and Friends

“Many small business ventures without large budget layouts solicit family and friends for capital during the start up phase. There are several advantages to this approach. For starters, these people are usually not very interested in structure and may not be represented by their own attorneys. Regardless of the innate informality of these relationships, efforts should be made to ensure that all of the proper information is provided to these investors, whether that be a subscription agreement, shareholder’s agreement, or other formal offering agreement.” (Guide to Acquiring Funding for New Businesses by Zumwalt Law Group)

4.Venture Capital

“Today, few venture capital firms are interested in startups. Like so many other investors, VCs want proven ideas and are looking for sales, intellectual property, and functioning businesses that need to expand. Even during the heyday of the 1990s, it was extremely difficult to get venture capital and only a tiny portion of applicants ever saw checks come their way. Nonetheless, venture capitalists are repositories of money, expertise and contacts, and if your young company decides to take this route, you need to be well prepared to meet their requirements.” (When Venture Capitalists Say “No” by Ron Peterson)

5.Angel Investors

“Angel investors are people with a lot of money who are interested in investing in entrepreneurial businesses, usually at the start-up stage. They typically give you money in exchange for a share of your business but the money they invest in your business is a smaller amount that what you would receive from a venture capital firm… Angel investors usually invest in businesses involved in industries in which they have some knowledge. This also decreases their individual risk.” (What is An Angel Investor and How Do I Find One? by Gronsky Law Office)

6.Crowdfunding

“There has been a lot of talk recently about a phenomenon called crowdfunding, a new type of fundraising that relies on social media and the Internet to raise small amounts of capital from large numbers of individuals. Despite the talk, crowdfunding remains impermissible under the securities laws absent a costly registration with the SEC and with state securities administrators… On November 3rd, the House of Representatives passed the Entrepreneur Access to Capital Act. The bill would create a new category of exempt transaction by adding … a crowdfunding exemption.” (The Entrepreneur Access to Capital Act and What It Could Mean for Startups by Sheppard Mullin Richter & Hampton LLP)

7.Private Company Financings

“The rules for most private company financings are found under the Securities Exchange Commission’s “Rule 506,” which dictates how individuals and startups must conduct themselves when seeking investment funds by selling securities (a share of stock, a convertible note, etc.). Running afoul of these rules can not only prevent you from raising the funds that you need, it could subject your personal assets to exposure, and in the worst case scenario, subject you to civil and criminal penalties. So, these rules can’t be taken lightly.” (5 Rules of the Road For Private Company Financings by Davis Wright Tremaine LLP)

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