Sources of Funding

Yourself

Personal assets may be used to capitalize your business. Savings, retirement funds or the sale of assets (e.g. garage sales, pawn shops) and investments may be sources of financing. Borrowing against the equity in your home or using consumer credit cards are possibilities, too. There are risks involved with borrowing against home equity, which should be carefully weighed with the assistance of a qualified professional.

Family & Friends

Friends and/or family members may loan you money to start your business OR they may invest their personal savings or other assets in your business. Terms of the loan or the investment agreement should be decided in advance and should be documented.

Community Development Financial Institutions

A Community Development Financial Institution (CDFI) is a financial intermediary that offers a range of financial services and programs to accomplish their primary mission of community development. Most commonly, CDFIs provide credit access to people considered “unbankable” through revolving loan or micro-loan funds. CDFI services are generally targeted at specific populations (e.g. people who will operate their business in defined neighborhoods or people within a certain income range) with loans, usually under $25,000. There are other organizations which are classified as CDFIs, but they are not financing sources for most micro or small businesses.

Government

The US Small Business Administration (SBA) provides loan guarantees under its 8(a), 504, 7(a) and Low-Doc Programs. These programs are administered through regulated financial institutions or community development corporations (CDCs). Also, call your County and City office to find out if local financing programs are available.

Regulated Financial Institutions

Regulated Financial Institutions (banks and credit unions) provide a variety of financial services to individuals and small businesses including lines of credit, term loans and mortgages. New venture financing is primarily based on the borrower’s ability to repay the loan. As the business grows, personal assets and financing will still be heavily considered, but the bank will begin to rely more on the business’s ability to generate revenue for payments.

Your loan proposal will be evaluated on your:

Relationship with them
Management Ability
Collateral
Owner’s equity
Cash Flow
Credit history

Investors (AKA Angel Investors)

Investors or Angels contribute capital to your business in return for partial ownership or debt repayment. They may or may not participate in the management of the business. Financing can take many forms from a simple partnership or debt financing to a public or private stock offering. Usually the investor/shareholder shares in the distribution of earnings, called “draws” in a partnership or “dividends” in a corporation. The amount of the distribution earned by the investor is related to the percentage ownership or the number of shares held. Seek advice from a CPA or other financial professional when considering this type of financing assistance.

BIDCOs

A BIDCO is a non-bank financial institution that provides assistance with financing as well as strategic consulting to small and medium sized companies. Businesses that do not currently qualify for conventional lending, may need a level of subordinated debt to qualify for additional bank funding, or are seeking expansion and need strategic planning may consider BIDCO financing. Viable candidates will have experienced management, two or more years operating history, a predictable cash flow, growth potential and will have achieved or nearly achieved profitability.

Suppliers

Businesses that supply your business with inventory and supplies may be willing to extend you credit. Generally, inventory or supplies are delivered to you under the agreement that you will pay the supplier in 30 to 60 days. As a new venture business without a track record, however, this will be an extremely difficult source to secure unless you have had a good prior working relationship with the supplier.

Venture Capitalists

Venture Capitalists provide equity investments to businesses experiencing rapid growth — 50% per year or more and revenues of $20-50 million in 5 to 7 years. In addition to firm ownership, venture capitalists will also want management input in the form of board seats or executive positions.

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