Avenues Open for Small Business
By Isabella Rossellini
The first and probably the most important thing for a small business entrepreneur to know is the different ways in which they can fund their business. Understanding the basics of small business funding is very necessary because it will help them to ensure that they make any financing decision in the right way. It will then be truly in the best interest of the company both in the short as well as in the long term.
Much of your business success will depend on the type of financing you chose as that will have a very far reaching consequence. In addition to that, you must also consider the smaller and yet more immediate effects and impacts rendered by these different types of small business financing options.
First you will need to understand the types of financing available for small businesses. Well, you may come across different terms and forms of funding but ideally business financing comes in two basic forms namely equity financing and debt financing.
Equity financing features
In most of the times, entrepreneurs often resort to equity financing to get the desired finance for their business. Equity financing involves the following characteristics:
- It is obtained with an exchange of capital straight for a possession interest in the company and
- Such ownership may be expressed as a fraction of the share in the company.
- The share of ownership of the company can further be categorized in two distinct forms such as private equity or as venture capital.
Private equity: The features if this specific form of equity financing is:
- Private equity is a specific from that is limited to the small businesses but it also has a large potential to help the small businesses to raise their business capital in a useful and advantageous way.
- Private equity may be obtained from professional institutions and networks but it can also be obtained from a community networks which is a more common source.
- The community networks can be social networks involving friends and family, professional networks such as employees and complementary businesses, or local networks such as your neighbors.
A specific type of private equity funding is Community Sponsored Agriculture. Ideally, In CSA the employees and patrons will purchase shares in the upcoming crops. With the money thereby obtained, you can use it for paying for the seeds, hiring the equipment and salary of the workers. In return, the CSA shareholders will receive a part of the produce yield either or a weekly or a biweekly basis.
Venture capital: The features of venture capital on the other hand include:
- A lump sum provided by the venture capitalists upfront to small business owners in exchange for a percentage of share in the in the company in the event of a sale
- It may include an Initial Public Offering and as such the venture capitalists may only invest in those companies that are more likely to go public in the near future
- Most of the venture capitalists tend to stick to a common demographic while financing such as companies that are 3 to 5 years old or have the potential to become the national competitors
- They look for more than average returns for their investments to the businesses for raising capital
- They also may provide guidance and counseling to the business owner for proper operation and utilization of the money.
However, there may be a few venture capitalists who may not provide any guidance actively they find that your business is not performing as expected.
Debt financing features
You may also opt for debt financing from a traditional bank or other sources such as nationaldebtrelief.com or any other of your choice.
However, debt financing is completely different from equity financing in several ways but the most important and distinctive feature is that there is no need to give up your business equity if you avail this type of business financing.
- Since there is no ownership interest in this type of funding there is no chance of losing control over your business. Your liability is simply relinquished with the monthly payments that you make for the stipulated time.
- Debt financing may be obtained from a wide variety of sources and a few of these sources may be business oriented and a few may be personal. These sources include and are certainly not limited to the commercial banks and finance companies, Small Business Administration programs, personal savings and loans, credit unions, Chambers of Commerce and even family and friends. Ideally, as you can see that debt financing is the major source of funding small businesses.
- Another significant feature of debt financing is that these business loans usually have a shorter term. The repayment terms is spread over the years that may be one or many depending on the type of loan obtained.
Many entrepreneurs also choose other private sources of funding their business such as a home equity loan. This type of a loan will typically spread the debt obligation over a large number of years having a longer term.
Choosing between the two
When you want to make a choice between debt and equity financing there are a few significant factors to consider.
If you are okay with giving over the control of your business, at least a part of it, to another person then you can go for equity financing.
On the other hand, if you do not want to forego an iota of your control from the business and also are confident that you have or will have enough resource available to make the monthly payments on time then debt financing should be your ideal and most feasible choice.
One last thing to consider is that equity financing may not have any monthly payments, which might be very tempting, and more money can be raised with more ownership foregone, but there is a risk of having too much equity. It will lead to divestment in form of ownership interest and eventually may result in over-leverage. This will surely jeopardize the survival of your company.
Isabella Rossellini is a marketing and communication expert. She also serves as content developer with many years of experience. She has previously covered an extensive range of topics in her posts, including business and start-ups. You can also visit at Twitter.