Small business financing (or also known as venture capital – especially if referring to an equity injection into a venture capital-funded startup business) is the means by which a potential or existing business owner receives money to initiate a new business, buy an existing business or bring a new business into the business market. This financing is obtained primarily through personal savings, third party banks, credit unions, and investment funds such as wealthy individuals, venture capital firms, and others. It is important to note that there are two main types of small business financing – venture capital and private funding. While venture capital firms generally fund more rapidly than other funding sources, they also carry more risk (meaning they may require larger investment amounts), which could potentially reduce returns.
Private funding sources do not usually require a lengthy application, but because they are typically obtained from investors who are actively involved in the new businesses they are investing in, they are typically more willing to provide longer-term capital for new businesses. However, it is important to note that many venture capital firms require more detailed reports regarding their investments than individual private investors, so it is not uncommon for them to seek additional documentation from the applicant. This documentation typically involves a full description of the company, an explanation of why the company was started, a list of employees and the revenue they generate, and an evaluation of the business’s earning capacity.
There are several different business financing options available. Typically, entrepreneurs obtain one or more general types of venture capital – either through banks, SBA loans, or angel investors. There are also several alternative capital options available to entrepreneurs. Many entrepreneurs apply for small business financing based on the type of venture they have established – whether it is manufacturing equipment, manufacturing consumer products, or providing online services. In addition, some entrepreneurs seek venture capital for specific purposes, such as buying real estate, buying a manufacturing facility, funding an expansion, or creating a technology company.
Venture capital is generally considered the best short-term business financing options available to entrepreneurs because it provides immediate cash infusions with no interest payments required for the term of the investment. While most venture capitalists provide term loans that have a one or two year repayment period, they also can extend the terms of the loan if necessary. In most instances, these loans are made through private investment funds, which make small business financing options available to small businesses that have less than $1 million in total credit card debt.
Small business financing options based on equity investors come in two forms: angel investors and venture debt financing. Angel investors are individuals who purchase shares in a business as an individual. These types of financing arrangements often result in long-term commitments, but there are some exceptions. Typically, venture debt financing does not require monthly payments; however, there are ongoing fees associated with this type of financing program that must be paid.
In addition to providing business loans to startups, venture capital investors will also provide seed money for new companies. Seed money allows startups to fund their marketing expenses without having to raise additional money through personal savings or other third party funding. Many angel investors require startups to first submit business plans to determine if they are eligible for a minimum amount of venture capital.