Small business financing refers to the method by which an individual or aspiring business owner Obtains cash to start a new business, buy an existing business or obtain money to assist in financing future business activity. The Small Business Administration, a government agency has specific funding and lending programs for businesses in need of small business financing. The SBA loans are secured loans. That is, the borrower puts up his business as collateral for the loan. As such, the risks of not being able to repay the loan are substantially reduced, thereby making this form of small business financing very attractive to small entrepreneurs.
Venture capital is commonly referred to as private equity, a term that is also used to describe financing offered primarily by wealthy individuals or organizations. Unlike bank financing, venture capital is not typically repaid. It is given to an entrepreneur “white label” meaning that whatever portion of the investment is raised from the business investor and used in the operation of the business, the investor retains all rights to that portion of the capital. There are typically no restrictions on the use of this capital. Venture capital generally pays more than six to twelve times the value of the equity and is typically obtained from private individuals, venture capital funds, venture capitalists or angel investors.
Another method of small business financing is debt finance, which is usually referred to as debt loans. Debt financing is the raising of an amount of debt to satisfy the cost of debt payment. Debt capital is a type of unsecured debt. This can include the payments on a mortgage, a car loan or other long-term loans. While debt financing can be attractive to businesses that do not anticipate high levels of activity, it generally is not appropriate for businesses that will receive high levels of activity, since the repayment terms are usually more compressed with debt financing.
The most familiar type of business financing is commercial loans, which may be secured by a borrower’s collateral, such as a building or property. The other three basic types of business financing are lines of credit, merchant cash advances and purchase loans. Lines of credit are available for a set period of time and must be paid back within a specified period of time. Merchant cash advances and purchase loans can be renewed over several years.
There are a number of online loans that can finance your business expenses. These business financing options available through the internet are very convenient for your business finance needs. Some online loans even offer business financing options available via faxed signatures. You should consider all of your business financing options before you apply for a loan.
In the past, many entrepreneurs have considered using private equity as their form of business finance. However, recent changes in the Small Business Administration regulations have made it more difficult to obtain SBA loans. Private equity loans are now considered an alternative investment, which means they are not as closely regulated as bank loans and don’t require a personal guarantee from the venture capitalist. In addition, while venture capitalists are able to retain much of their investment when they sell their companies to larger investors, most small business finance deals require that the venture capitalist commit funds beyond their initial investment (typically 20 percent) as down payment and interest payment.