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Raising funds for a small business is often one of the most difficult and time consuming tasks for entrepreneurs. Taking time to do things right is essential for both the entrepreneur and the investors.

What are the primary sources of financing for a small business?
There are many different sources of funds for a small business:

Important Tip There are a lot of areas where a small business can take shortcuts on legal matters or use self-help solutions – financing your small business isn’t one of them.
  • Personal Funds.  The small business owner can provide the financing.  These funds can come from savings, credit cards or borrowing against assets.
  • 401(k) Accounts.  If the small business owner has a 401(k) account from a prior employer, she could have the account invest in the shares of the small business and provide funding.  This can avoid the early distribution penalties and taxes that are assessed due to early distributions from a 401(k) account.  In addition, a vehicle called an ESOP – an employee stock ownership plan – could be used where there are multiple business owners with 401(k) accounts.  It’s complicated, but could be used successfully in some situations.
  • Small Business Assets.  The small business owner can obtain funds through the small business assets, such as obtaining inventory on credit, selling receivables, obtaining furniture and fixtures on credit, and through trade creditors.  For example, a small business that is selling widgets, may be able to find a widget supplier that will provide the small business with 60 days to pay for the widgets – if the small business can sell the widgets in 30 days, then the small business will be able to repay the widget company.  Landlords may provide free rent for a period of time in exchange for signing a longer term lease.  If your small business needs computers, computer companies may provide you with computers on a payment plan so you don’t need to p[ay for them upfront.  Some banks will pay you upfront for the value of your receivables (or 85% of the value of your receivables).
  • Family and Friends.  As was the case with many successful small businesses, the small business owner can rely on family and friends and other personal acquaintances.
  • Banks.  The small business can go to traditional lending institutions like banks.  In seeking bank financing, small businesses should keep in mind various SBA (Small Business Administration) programs (such as ARC loans under the new economic stimulus programs) that help with attracting funds from banks for many small businesses.
  • Grants.  There are many grants available for small businesses such as technology grants and women and minority-owned small businesses.
  • Private Placements.  The small business can raise the money in private placements of debt or equity (stock) that are exempt from public registration with State or Federal securities agencies.  
  • Public Offerings.  The small business can raise the money in public offerings of debt or equity (stock) that need to be registered with State and Federal securities agencies.
  • Strategic Partners.  The small business can obtain financing from strategic partners, such as a franchise getting money from the franchise company, or a distributor getting funds from the companies it distributes for, or an entrepreneur getting funds from her prior company when her new small business is complementary with her old company.  Customers may also provide part of the funding by providing up-front payments for developments or services.
  • Venture Capital/Angel Investors.  Venture capital and angel investors are two types of different sources of debt or equity financing.  
  • Microloans.  Based on the popularity of the programs started in Bangladesh by Grameen Bank, there are new micro-lending programs being established throughout the world.  The Fox Valley Micro Loan Fund is one such program.
  • Peer-to-Peer Lending Programs.  Over the internet, there are beginning to be peer-to-peer lending programs such as prosper.com that may be worth considering.
  • 7(a) Loan Guaranty Program.  This is the SBA's primary lending program and was designed to meet the majority of the small business lending community's financing needs.  In addition to general financing, the 7(a) program also encompasses a number of specialized loan programs.  The following are a few of the many specialized programs:  Low Doc - designed to increase the availability of funds under $100,000 and streamline or expedite the loan review process, CapLines - an umbrella program to help small businesses meet their short-term adn cyclical working capital needs, International Trade - for small businesses engaging in international trade, or adversely affected by competition from imports, DELTA - joint SBA and Department of Defense effort to provide financial and technical assistance to defense-dependent small businesses adversely affected by cutbacks in defense and Certified Development Company (504 Loan) Program - makes long term loans available for purchasing land, buildings, machinery and equipment, and for building, modernizing or renovating existing facilities and sites.

Whatever you choose, or are able to obtain, there are important legal considerations to keep in mind.  Following the law and having proper documentation are extremely important in any type of financing for your small business.

 

 

Additional Information
Important Tip: 
There are a lot of areas where a small business can take shortcuts on legal matters or use self-help solutions – financing your small business isn’t one of them.
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Raising Funds