How to Finance Your Small Business Using Debt or Equity

Financing your small business may seem like a daunting task. However, there are more options when it comes to small business financing than you may think. From the debt financing of banks and other professional finance institutions, to the equity financing of angel investors and venture capitalists, the possibilities are numerous. Some businesses may even qualify for a small business grant. Learning of these options will help you to determine which solutions could be viable for your business venture.

Typically, entrepreneurs will first turn to debt financing from their bank, savings and loan, or credit union when it comes to funding their small business. Debt financing refers to any funds that are borrowed. Financial institutions will loan money based upon your credit history, the collateral you have, and your character, as well as your business plan. These elements help the lending institution to determine your ability to repay the loan. To help reduce the risk on the part of the financial institution, the U.S. government guarantees certain loans by way of the Small Business Administration. By guaranteeing that the loan will be repaid in the event that you default, banks are able to loan money to entrepreneurs that otherwise may not have qualified.

Another option is that of equity financing. In this instance, financing is based on the equity in your business and is traded for a portion of your profits. Shares of your company are sold in the form of stock options to private investors such as an angel investor or a venture capitalist. It is important to keep in mind that in order to be eligible for this type of financing, you must be prepared with a solid business plan that demonstrates that your business is economically viable. Due to this fact, equity financing is more commonly sought after during the growth stage, once a business has had a chance to develop some history.

Although grants are few and far between, for specific types of businesses, they can be worth pursuing. Typically, grants are funds given to select businesses and generally do not have to be paid back, making them highly sought after. Funds are limited due to the fact that they are generated from our tax dollars. However, someone must be the recipient of these appropriated funds, so it is worth it to apply. Grants are written for various types of businesses such as those that benefit the environment, or community, or those that further research. There are also grants created for certain groups of people, such as minorities. If your business falls under any of these categories, you may qualify. Grants can be researched with your local, state, and federal government.