Small Business Financing Options: A Brief Introduction

Financial assets are often what determine if a small business start up succeeds or fails and it is for that reason it is important to understand the options available to entrepreneurs. Even if all sources options are available for cash, it is critical that a close and in depth comparison is conducted to help reduce interest paid or shares forfeited and risk.

The most common and sought out financing option is the use of commercial bank loans. Bank loans are often the preferred option of getting cash because they do require business owners to turn over any equity or control to others. Loans, depending on the size can take many years to pay off and are not available for everyone. In fact many businesses and start ups do not have access to loans due to the amount of financing needed, bad credit and/or too much risk involved.

The second option entrepreneurs should consider is getting investors (the first option if business owners do not mind giving up some control). If large amounts of financing are needed this may be the only option. There is little risk involved as the investors money becomes the companies money in exchange for shares or part ownership, this means when the company profits they profit and when it loses they lose. The issue is actually finding investors. There are two main types of investing parties for start ups and small business, angel investors and venture capitalists. Angel investors often invest smaller amounts in higher risk companies while venture capitalists are much more risk avoidant and often invest higher amounts and only target established and high growth companies.

Less desirable options include home equity loans and financing through credit cards. Home equity loans, although a cost effective substitute for business loans (they often have lower interest rates), pose a high risk because they require the borrower to use the equity of their home as collateral. Credit cards are often used for cash advances when smaller amounts of capital are needed, the issue with using credit cards is the interest can building leading to thousands of dollars owed leading to bad debt. In most cases both options should only be considered as a last resort and in low risk situations.

The safest method of small business financing is your national and regional governments. Each year millions of dollars are placed aside to provide grants and low interest loans to start ups and small business helping entrepreneurs get the financing needed with little risk and interest paid while stimulating the economy.

It is important to weigh all the options and risks, ask yourself what amount is actually needed and if the risk is worth it. For small fees, financial planners can help entrepreneurs choose the right option.