Small Business Funding

Banks

Bankers, while conservative in nature, are more open to funding expansion programs than providing money for start-ups, because longevity is equated with stability. Banks are geared for expansion because they know that a successful, growing business means more money that can be made by them as a primary lender in the future. Banks have many programs that can help you.

Asset-base financing This small business funding option is offered by banks to provide loans based on collateral, which includes inventory, equipment or accounts receivable. Banks prefer accounts receivables because values locked in this asset can be quickly converted into hard cash. Typical amounts financed are 75% for accounts receivable and 50% for inventory, which is more difficult to convert into cash. Equipment financing percentages depends upon the age and condition of the equipment

Line of Credit This is an account into which a bank provides a set designated amount for a business to draw upon during the down cycles. As funds are withdrawn, the line of credit decreases. As payments are made to cover withdrawals, the credit amount is restored, and can be drawn on again as needed. There is no interest charged for these accounts. This is a ling of credit’s key advantage. Even if you don’t presently need one, it’s a good idea to obtain one when business is good.

Letter of Credit A letter of credit is a promissory statement written by a bank that backs a business and its obligations, useful for buying products or equipment. Banks charge interest on these accounts in return for making the guarantee.

Floor Planning The business owner puts up his inventory as collateral for a loan. As the inventory is moved, the loan is repaid from the proceeds. Car dealerships often use this method of small business funding.

The Small Business Administration

The Small Business Administration does not offer loans directly, but guarantees a percentage of a loans underwritten by banks participating in the SBA loan program. This type of small business funding is useful and attractive to banks who are more inclined to provide a loan that the SBA will guarantee, because it offsets any perceived risk they have about a loan applicant.

While the Small Business Administration is more open to guaranteeing loans, it still limit’s the risk it will take with stringent criteria. A business must fit its parameters on size, number of employees, credit history and positive cash flow projections that will allow a business to repay the loan.

State Economic Development Offices

Every state has a economic development office whose purpose is to help businesses expand. Criteria is similar to that offered by the Small Business Administration.

Small Business Funding Angels

Small Business Angels are investors who have experience in small business funding and have ready, available funds available that they can loan is a business meets their criteria. Angels are more open to lending than banks, but part of the price demanded by angels is an active role in managing the businesses activities as a way of guaranteeing that their loans will be repaid.

Venture capital

Venture capital firms offer small business funding in exchange for partial ownership of a business, usually up to 50%. Venture capital firms prefer high risk, high reward industries, funding companies or company products where the payback can be high. Venture capitalists are even more conservative then banks, funding only 2% of all deals presented to them. Additionally, once involved in the business, venture capitalists must be bought out if the business hopes to regain its autonomy.