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Possible Sources of Financing for Your Business


Potential sources of financing for your new business are equity (shares of the business) and debt (loans). 

 Equity investors will look for potential profits and increases in value, whereas lenders will be concerned about cash flow, which for them boils down to generating enough cash every month to make your principal and interest payments

 In general, you cannot get financing without putting some of your own money into the business (usually at least a quarter of the total).

 Both investors and lenders look at the ratio of debt to equity, or leverage, to make sure it is not dangerously high.

Your Own Resources: 

  • Equity: Your personal savings
  • Debt: Personal loans, especially home equity loans
Note 1: "It is usually quicker, easier, and cheaper to use personal loans for a business start-up than to try to get a loan to the business itself. Home mortgages are an easy solution, but in the worst case you could lose your house."

Note 2:" Try to avoid using credit cards. The interest rate is too high, and it is usually unwise to use shortterm debt for a long-term purpose such as a business start-up."

Friends, Fools, and Family:

  • Equity: Shares in the company (usually requires incorporating)
  • Debt: Loans from friends, fools, and family
Note: If the business fails, equity investors usually lose their money (and the entrepreneur may lose their friendship). Lenders expect to be repaid, sooner or later

Small Business Financiers:

  • Equity: “Strategic” investors, such as suppliers, who will gain if your business succeeds. For example, look on the Internet at www.activecapital.org. Also look into small business investment corporations (SBICs), which are scattered throughout the United States and usually have federal governmental assistance. Go to www.sba.gov/INV and click your state on the map to find an SBIC near you
  • Debt: Microcredit organizations, bank loans, loans, and loan guarantees from the U.S. Small Business Administration (SBA). You will normally need to apply for these programs through a commercial bank that works with the SBA.
         Export Working Capital (guarantee for individual transactions)
         Export Express Loan
         International Trade Loan (for established businesses)

Alternative Methods of Financing

  • Leasing: Leasing equipment, such as computers, can save your money for use as working capital.
  • Fixed asset financing: If you already own land or equipment, you may be able to use it as collateral for obtaining loans.
  • Trade credit: When you have even a small track record, suppliers will often give you 30 days or more in which to pay them.
  • Export credit: The Export-Import Bank of the United States, and similar organizations in some states, can lend (or guarantee loans to) your foreign importers so they can buy from you and pay you immediately. 
  • Factoring receivables: If you make large sales on credit, either in the United States or overseas, you may find a factor who will take over the collection process and lend you money before he collects. Sometimes you can even sell a receivable “without recourse,” which means that if the buyer does not pay, it is the factor who loses. You can find factors on the Internet by searching for “factoring receivables” or “accounts receivable financing.” 



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