Determining how you will fund your business is a vital step along the path to success. There are many different options for financing a business operation and it is imperative that you explore and research all opportunities before you make such an important decision.
Many new business owners or entrepreneurs get discouraged when seeking potential investors who are generally not quick to invest money in a great idea or product. In fact, most new, small businesses are funded primarily by personal resources: savings, friends and family, or personal credit cards. It is important to look into all options as there may be better alternatives available for you. It is also important to remember that a complete and sound business plan is vital for securing financing.
When it comes to borrowing money, it is helpful to be prepared for the basic questions and considerations that lenders and investors will evaluate. Some of those factors include the following:
How To Finance Your Business
CREDIT
Lenders and investors will want to know that you have been responsible in paying prior or existing debts on time and that you and your company have managed credit successfully in the past.
CAPACITY
Your ability to repay a lender or an investor is proven by your business’ capacity to perform and make money. Lenders and investors will want to see your proven cash flow to determine the level of risk involved in their investment.
COLLATERAL
Lenders and some investors will require you to provide some type of collateral (generally in the form of real estate, equipment, home equity) to prove your commitment to the success of your venture.
CHARACTER
Lenders and investors must not only trust the business concept that they are investing in, but they must also trust you, the person in charge making that business successful. Lenders and investors will analyze your qualifications as a business owner, your reputation, and your overall character when making the decision to invest in you.
Traditional lenders are banks and SBA lenders who work primarily with small businesses that are established and can provide a minimum of three years of fiscal year-end business financial statements. Traditional lenders will also take into consideration your credit history, your business debt schedule, and your personal income. While traditional lenders are not quick to finance a start-up business, they can be a great resource for small business loans. The U.S. Small Business Administration has many different loan programs. To study all of the programs available, go to
Traditional Lenders
Non-Traditional Lenders
Unlike commercial banks, non-traditional lenders are more willing to take a higher risk to invest in a new company or start-up venture. Generally, these lenders will charge a higher interest rate than traditional lenders and may require more documentation or additional collateral.
Personal Resources
Personal resources are generally the primary form of funding for many small businesses. Personal resources include: savings funds, credit cards, gifts or loans from family and friends, or even home equity loans.
Peer-to-Peer Lending
P2P lending allows individuals or businesses to use online lending services that pair borrowers and lenders together. P2P lending is much faster than other forms of lending, an application can be completed in less than a few hours and funds can be available within days. This type of lending has gained significant popularity because of the ease of access and because lending rates are generally lower than traditional banks. P2P lending can be harder to qualify for than other forms of financing as P2P lenders generally require a good credit score (600 or higher). Here are some examples of P2P sites:
Angel Investors
Angel investors usually invest seed money in start-up companies in their early stages in exchange for company equity or a high percentage of return on their investment. Angel Investors can also provide their experience and expertise to the companies they invest in. As a general rule, angel investments generally stay below $1 million.
Venture Capitalist
Venture capitalists generally invest large amounts of money into companies that demonstrate high-growth. As a general rule, venture capitalists usually do not invest less than a million dollars. Venture capitalists also expect to recover their investment quickly, generally within 3-5 years.
Crowdfunding
Crowdfunding has become a very popular tool for many emerging businesses and entrepreneurs. Online crowdfunding allows businesses to receive small investments from many investors to reach their funding goal. It is important to carefully research the rules of each crowdfunding site to determine if there are fees associated with using the site and other requirements that may affect your fundraising goal. Here are some examples of crowdfunding sites:
Microloan Program
This US Small Business Administration program provides small loans up to $50,000. Non-profit, community-based organizations with experience in lending are selected to administer this program to eligible borrowers. The U.S. Small Business Administration – Phoenix District Office maintains a current list of microloan lenders, along with all SBA lenders at their website:
Grants
It is important to note that grant funding is often not made available to individuals who are starting or expanding a small business, unless your business has a very specialized focus on science, technology or research. If you are interested in researching this option, www.grants.gov offers a comprehensive list of federal grant funding available.
For more information on small business financing, visit the Arizona Commerce Authority website at: www.azcommerce.com