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FAQ: Business Organizations and Transactions

What are sources for small business financing?

One method for small businesses to obtain money is through "equity financing" or "debt financing." Equity financing means that you sell stock in your company to a buyer, who then has an ownership interest in your company. Debt financing is a business loan — you owe the person or entity that holds the debt (usually in the form of a promissory note) the amount borrowed and interest. Here are the most common sources of equity and debt financing for small businesses.

You. Contributing your own money to your business is the easiest way to finance it. You can tap into your savings, use a home-equity line of credit, or sell or borrow against a personal asset, such as stocks, bonds, mutual funds or real estate.

Family and Friends. Your parents, relatives and friends may have access to more cash than you do. They may be willing to lend you money or take an ownership interest in your company.

Small Business Administration. The Small Business Administration (SBA) offers a number of loan programs to small businesses. Through these programs, the SBA provides loans to small businesses that are not able to obtain financing on reasonable terms through normal lending channels. You can apply for these loans through your local participating lender, usually a bank.

Banks. Banks make a majority of loans to small businesses. But for start-up businesses, banks can be the hardest place to find money because, to ensure prospects for repayment, bank-lending standards usually favor a history of profits that start-ups do not have. If you have a good business plan and personal assets that you can offer as collateral (or a guarantor or cosigner satisfactory to the lender), you may be able to qualify for a bank loan.

Credit Cards. If you have a credit card, you have a built-in line of credit. Credit cards are one of the most costly ways to finance your company. Nevertheless, start-up businesses routinely use credit cards as a source of funds if they are unable to obtain financing elsewhere.

Leasing Companies. Through leasing companies, businesses can finance computers, office equipment, phone systems, vehicles and other equipment. By leasing equipment, you can lower your initial costs because you won't have a large outlay of cash for the equipment. You can also more easily upgrade your equipment upon lease expiration.

Customers. If you have existing customers, they may be willing to pay you in advance for your products. Then you can use their money to purchase products or inventory.

Trade Credit. Vendors and suppliers are often willing to sell to you on credit. This is a great source of financing for both start-up companies and growing businesses.

Small Business Investment Companies. Small Business Investment Companies (SBICs) are licensed and regulated by the Small Business Administration. SBICs are privately owned and managed investment firms that provide venture capital and start-up financing to small businesses.

Venture Capital Firms. Venture capitalists provide funds to companies that they believe have exceptional growth potential. Very few small businesses are able to obtain financing through venture capital firms.

Investment Banking Firms. Investment bankers "take companies public." That means that the investment banker offers stock (an ownership interest) in your company to the public. This option is generally only available to small businesses that have very strong growth history and potential.

Private Placement. A private placement is an offer of stock or debt to wealthy individuals or venture capitalists without going public.

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