Sources of Financing

Sources of Financing for Small Companies

By: The Vanilla Team | Download PDF

After the startup phase, one of the biggest challenges that small companies face is finding capital to help finance or expand operations (to buy new equipment, purchase inventory, open new stores, etc.). If you own a growing business, there are four main sources of financing for you to consider:

1. Friends and Family. An entrepreneurial tradition (often referred to as “the Family Bank”). This resource usually comes into play after you’ve invested personal resources, but before strangers are willing to take a chance on you.

Biggest advantages: Affordable, flexible, no business plan required.

Helpful resource: For more info about borrowing and lending with friends and family, check out the Virgin Money USA web site.

2. Bank Loans. Generally the easiest and most cost-effective way for small companies to obtain additional financing (after the Family Bank). Before granting a loan, the bank will want to review your financial history and see a business plan documenting why you need the loan and how you plan to repay it.

Tip: A revolving credit line is often the best option for small businesses because it allows you to tap into money without filing a new application each time you draw funds.

3. SBA Loans. These are federally backed loans offered by the U.S. Small Business Administration (SBA), designed to help qualifying small businesses. Contrary to what most people think, the SBA does not issue loans or disburse money – they just set the guidelines. If you want to apply for an SBA loan, you should go directly to an SBA-approved lender.

Biggest advantage: The U.S. government “guarantees” 70-90 percent of an SBA loan, making it far less risky for the bank.

Helpful resource: To learn more about SBA loans and other programs for small businesses, check out the SBA web site.

4. Venture Capital. Venture capital is private funding provided to early-stage, high-potential companies by angel investors and/or professional investment firms. In exchange for cash, VC firms take an ownership stake in the business (typically 20% or more) and hope to reap a large windfall through an IPO or sale of the company. As exciting as this may sound, venture capital is not a realistic option for most small companies. As one expert put it, “The odds of raising venture capital are equal to the odds of getting struck by lightning while standing at the bottom of a swimming pool on a sunny day.”

Biggest advantage: Can provide large amounts of capital and expertise to unproven young companies.

Helpful resource: If you’re interested in taking the VC path, we recommend reading The Art of the Start by Guy Kawasaki.