A guide to options in financing a new business
Question: I recently attended the loan clinic sponsored by SCORE and the National Bank of Arizona, and I have more questions about finding sources of financing options that will enable me to start a new business. Can you give me additional guidance?
Answer: One of the biggest hurdles a new entrepreneur will face is financing his or her business. There are many available sources of start-up financing that are not as difficult to obtain as one may think. The key is to find the right type of financing that will serve your specific needs. This includes determining exactly how much you need and what your responsibilities are to the lenders, as well as knowing how to use those funds wisely. A wrong move in any one of these areas could make the difference between success and failure for your small business.
Sources and types of small business financing fall into a few broad categories. It will either be debt or equity financing from institutional or informal sources. Debt financing is a loan you pay back. Common sources include family and friends, personal credit cards, home equity lines of credit, commercial bank loans and bank loans backed by the U.S. Small Business Administration (SBA).
Some small businesses also receive a type of funding from suppliers and vendors in the form of special payment terms, discounts or even direct loans. Lenders want you to succeed because it means more business for them, so they are oftentimes willing to help.
With equity financing, you offer investors shares of your business in return for cash. Unlike loans, you are not required to pay the money back, but these investors now own part of your business and will want a return on their investment. Venture capitalists work this way, and stock offerings are a type of equity financing.
Also, the SBA offers several financial assistance services for small businesses, including the popular 7(a) loan program. Most U.S. banks participate in the program, which provides loans on a guaranty basis, i.e., lenders structure their own loans based on the SBA's requirements. Details about all SBA loan programs and other helpful information for structuring a financing strategy may be found at www.sba.gov/services/financialassistance.
Other funding or cost-sharing options include partnerships, joint ventures, alliances, co-branding arrangements and business incubators. Incubators rarely offer cash, but they provide crucial support in the form of free or reduced rent and business services. Don't forget that your SCORE counselor functions as your advice partner and can assist you in determining which type of financing will work best for you, and will be there as a resource for you as you build your business.
Northern Arizona SCORE's mission is to serve the area as counselors to small businesses and non-profits. SCORE works in collaboration with northern Arizona Chambers of Commerce, the Small Business Development Center, and NACET, and is developing branches in Flagstaff and the Verde Valley. SCORE is actively recruiting volunteers for these markets as well as in the greater Prescott area. SCORE provides training and ongoing support to our volunteers. To learn more, contact Northern Arizona SCORE at 928-778-7438, e-mail us at email@example.com, or visit www.scorenaz.org