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Funding sources

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Funding sources are the sources from which someone obtains the funds necessary to startup or operate a business. There are several sources available for such funds, also called capital.

SmallBusiness.com Guide to Alternative Funding

In addition to this entry in the SmallBusiness.com WIKI, SmallBusiness.com provides a collection of articles on this topic as part of ther SmallBusiness.com Guide to Alternative Funding and a helpful article, "9 Sources of Funding for Your Small Business"

The Guide to Alternative funding includes:


Funding Sources

Self-financing

The owner can finance it himself or herself through savings or other available personal resources.

Loans

Bank loans

The owner can also raise capital for a business using an equity loan on his home or other assets he or she may own. Many owners seek a bank loan in the name of their business, however banks will usually insist on a personal guarantee by the business owner. In the United States, the Small Business Administration (SBA) runs several loan programs that may help a small business secure loans. In these programs, the SBA guarantees a portion of the loan to the issuing bank and thus relieves the bank of some of the risk of extending the loan to a small business.

Credit card debt

Financing a business with credit card debt is usually a poor choice, the interest rate on credit cards is often several times the rate that would be paid on a line of credit or bank loan.

Micro Loans

There are thousands of alternative small business loan programs available but can be difficult to find. These programs include local micro loans, revolving loans, gap financing, incentive programs, loan guarantees and more. Funding for these programs comes from a variety of federal, state and local sources including; the Small Business Administration (SBA), U.S Department of Agriculture - Rural Development (USDA), Economic Development Administration (EDA), etc, and are given to economic development agencies, not-for-profits and other groups to increase economic opportunities and increase/retain jobs.

Unlike commercial lenders, these programs are focused on job creation and retention, so they typically don't have the same strict lending and credit requirements that commercial banks require and these funds are often offered at a lower interest rate.

Alternative Funding

An emerging means of business funding is via alternative funding. Unlike the aforementioned micro-loans which are non-commercial in nature, commercial alternative funding tends to serve different purposes than aiding startups, and creating jobs. These type of loans usually carry higher interest rates than funding means, but serve particular purposes:

  • - Amounts that are too small for banks but too large for micro-lenders (~$10,000-~$25,000) region.
  • - Immediate cash injections which are required in very short timelines (lenders like OnDeck will approve or reject in up top 10 hours from the completion of application).
  • - Bad credit businesses which are rejected by traditional lenders.

There are several variations to alternative business funding. Peer to Peer lending, an online services provide a marketplace between lenders and borrowers, is the most popular one. Others include short-term-B2B loans, loans against invoices, online invoice factoring, revolving credit lines, and more.

Collateral Loans

Collateral loans are a secured type of loan where the individual or business is able to prove value of a particular asset, and then receive a monetary advance based off of that value from the lender. Many people do this each and every year with their homes in the form of a HELOC (Home Equity Line Of Credit), but businesses choose to do it with certain assets. Large manufacturing companies with state of the art, one of a kind, assembly lines are sometimes able to appraise and finance these mechanisms. Large production machines are also common items that are considered for secured financing and if you have several personal or fleet vehicles, depending on which state your in, car title loans (loans based off of vehicle equity) may be an option for you. Just about any item that is free of any liens and has a higher, verifiable value can be financed nowadays but some other items that are considered for personal or business collateral loans are:

  • - Precious Metals And Jewelry
  • - Historical Items
  • - Company Buildings

Investment capital

The owner can finance a business by getting investors to purchase stock in the company (although there would be legal problems if it were offered to the general public). A partnership can be formed or perhaps a venture capitalist could provide funds if the business venture plans were sound enough. There are some early stage investors called angel investors who invest in startup companies. Friends and relatives can also loan money. The owner should realize that if anyone else participates in the venture some elements of control will be lost. All investors should be aware of the risks involved when one invests in a startup business.

Grants

In certain circumstances and for small businesses in specific industries and niches, sources of funding may be available from governmental or private sources in the form of grants. Unlike a loan, these funds are typically not paid back to the source. However, grants come with requirements attached. These requirements can range from research results, reports or specific products and services. Grants can be available from a wide array of sources including federal government agencies, state government agencies, or Institutional grants|grants from educational or corporate institutions and private foundations.

While the federal government has no grants specifically for being a small business, there are grants available for specific studies or services that have set-asides so that a portion of the grants are awarded to small businesses. States and cities often have various types of grants for small businesses.

See Also

External Links