Highlights
Seed capital is needed for entrepreneurs to start up their dream business while growth capital is needed to expand and move the venture toward growth phase. The entrepreneur's ability to finance capital is therefore, crucial to the success of the venture.
There are two types of financing - equity financing and debt financing. Ownership will be diluted by equity financing while financial obligation is required by debt financing.
I. Equity Financing
There are a variety of sources of equity financing:
Personal saving, friends and Family:
The most prevalent sources of funding for small business are through personal saving, friends and family. Capital is raised with great ease because of the trustworthy relationship.
Private Investors:
Another potential funding source is private investors who look for good business opportunities with better potential rewards. Typically, private investors are people who entrepreneur knows or has met through business acquaintances.
Venture Capitalists:
Venture Capital firms provide funds to growing young companies in exchange for equity. Large sums of capital are available but it is difficult to secure, especially for start-up ventures.
Small Business Investment Company (SBIC):
SBICs are financial institutes licensed by SBA. They provide equity capital and long-term debt to the small business community. SBICs can be found by contacting the SBA.
II. Debt Financing
There are several sources of debt financing:
Loans from Family and Friends:
Often, money is loaned at no or with low interest because of their relationship.
Small Business Administration Loans:
An SBA loan is a small business loan made by local bank that is in turn guaranteed by Small Business Administration. Through SBA's guarantee, entrepreneurs can gain access to capital with great ease. SBA loan sizes vary from $5,000 to $2,000,000.
Commercial loans:
Loans are available through commercial banks and commercial finance companies. Usually, collateral is required and strict financial obligation has to be met.
III. Suggestions
Usually, in start-up stage, financing occurs through personal resources, SBA loan, private investors and then SBICs. Other forms of financing including commercial loans, venture capital would be then considered in the growth stage.
In considering all financial options available, entrepreneurs should carefully examine the chosen method to avoid potential ownership conflicts from equity financing or possible financial distress from debt financing.
Guide to the Small Business Adminstration
This site has been rewarded the best business finance site. It provides great financing information for small business including sources of financing, how to write a loan proposal, SBA financing programs and working tips for how to apply SBA loan and how to work with your bankers.
Business Resource Center's web site contains valuable financial guide for small business entrepreneurs. It includes various loan options, equity alternatives and venture capital analysis. This site is very informational and helpful.
The SBA site lists all financial assistant programs available at SBA with detailed information. Other related small business topics regarding starting, expanding business are also covered in depth on this web site.
Articles on Insider Reports site give tips on different financing options and on how to attract investors. This site provides free business reports, legal forms and business letters in its onsite library.