Smart Small Business Financing
Starts With Knowing Where To Look
financing doesn't have to be hard. But it
requires more from you than an idea and a dream . . .
It is true: Small business
financing requires more from you than hiring a good
business plan writer. While there are many kinds of financing options
that require a business plan, no matter how well they are written,
business plans do not generate small business start-up loans or working
In a struggling economic climate, the availability of small business
credit contracts rapidly, making financing a small business a very
challenging task. It takes great effort, creativity, and perseverance –
and knowing where to look . . .
Where to Look for Small Business Financing
Where you look for money, and how you look for money, depends on your
company and the kind of money you need. There is an enormous
difference, for example, between a high-tech company looking for
expansion funding and a local retail store looking to finance a new
Commercial banks are the most likely source of small businesses
financing, so they are where most entrepreneurs and business owners
turn first. Contrary to popular belief, banks are not a good source for
small business start-up loans, but they do much of the small business
lending and administer and provide funding for small business loans
backed by the U.S. Small Business Administration.
Banks are often criticized for their refusal to offer small business
start-up loans, but they not supposed to use the savings from
depositors on investing in risky business ventures. Regulators require
banks to keep depositors’ money safe, making only conservative loans
backed by solid collateral. In most cases, small business start-up
loans are not safe enough to satisfy bank regulators and the businesses
have little or no collateral.
If they don’t offer start-up financing, then how can banks be
responsible for most of the small business lending?
Because entrepreneurs and business owners get most of the money they
need from bank loans.
A great deal of small business financing is accomplished through bank
loans based on the business owner’s personal collateral, especially a
home. Some experts say that home equity has historically been the
greatest source of small business financing.
Once a business has been around for a few years, it may have enough
stability and collateral to persuade a bank to provide accounts
or an asset based loan backed by its
Business Financing Myths
- Business plans generate small business start-up loans and
- Banks provide most small business start-up loans.
- Venture capital funding is a widely available and reliable
Venture Capital Funding
Sometimes disparagingly called “vultures,” venture capitalists are
criticized both for their reportedly predatory business practices and
narrow mindedness because they seem to all fund similar kinds of
Neither is true. Venture funding is a business, and venture capitalists
are business people who are charged with investing other people’s
money. They are not supposed to take more risk than is absolutely
necessary to produce the returns required by their investors.
Venture funding is rarely available for starting a small business
unless there is an unusual combination of product innovation, market
appeal, and proven management. Start-up financing has to have
reasonable chance of spawning a rapidly growing company and producing
an exceptional return on investment. So if you find yourself
your new company is a candidate for venture funding, chances are, it
You can find venture funding online. A couple of good sources are
the Web site
of the National Venture Capital Association
of Mid-Atlantic Venture Funds, a
venture-capital firm in Bethlehem, PA. Check your library or the Web
for Pratt’s Guide to Venture Capital Sources and The Directory of
Buyout Financing Sources, both published by Thomson Financial
Try to avoid turning to friends
and family for your small business financing. The worst possible time
to not have their support – or worse, their hostility!– is when your
business is in trouble.
You risk losing them and your business all at the same time.
Private loans and equity investments from so-called angel investors
provide a great deal of funding for many new and existing companies. In
the jargon of small business financing for start-ups, groups of
investors are sometimes referred to as “doctors and dentists,” while
individual investors are called “angels.” Many entrepreneurs turn to
friends and family for angel financing.
Private lenders and angel investors can be hard to find. Professional
business loan brokers in your area should know both how to
find them and the types of businesses they are interested in financing.
You may also find angel investors through your local Small Business
Development Center (SBDC), the Small Business Administration (SBA)
office in your area, and by searching online.
The Small Business Administration (SBA)
Without a doubt the most well known small business lending source is
the U.S. Small Business Administration, which makes small business
loans to existing firms and entrepreneurs starting a small business.
An SBA loan will generally be administered by a local bank (an SBA
“certified lender”), which will handle the entire process from
application to funding. And it can be a quick process at that,
sometimes requiring less than a week for an SBA approval.
For small business start-up loans, the small business administration
will normally require the new business owner to supply at least
one-third of the initial capital. And the rest – the amount
loaned – must be backed by business or personal assets.
Asset Based Finance
Asset based finance is a widely accepted and popular alternative to
traditional small business lending.
The most common type of asset based finance, accounts
, is used for cash flow management and working
financing when business funds are tied up in receivables.
To illustrate, say your business sells to distributors that typically
take 60 days to pay, and the outstanding invoices waiting for payment
total $50,000. Your company might be able to borrow more than half, or
$25,000, using an asset based loan or a new business line of credit.
you can use a related technique known as accounts receivable factoring.
Factoring companies will purchase your invoices for as much as 98% of
the face amount, advancing you up to $40,000 (or 80%) initially, with
the rest forwarded when the invoices are paid. In many cases, the
factor assumes the risk of non-payment, and handles the collection and
accounting, as well.
Interest rates and fees may be relatively high, when compared to
traditional small business loans, but accounts
still often a good source of small business financing.
is another asset based technique, but instead
of receivables factoring, you finance orders from your customers. For
example, if your company receives an order for $100,000, factoring
companies will advance you a sum of money to purchase the materials and
pay for labor to fill the order. When your finished product is
to your customer, you can sell the invoice to pay off the purchase
lien and collect your profit.
Most small business
comes from the new owner’s home equity or
savings at the beginning. Very few can attract either the interest or
willing investment of outside sources. Your idea and business plan may
both be good, but reliable small business financing remains dependent
on hard collateral and guarantees, not the hopes and dreams of the