Bank loans are the most popular external funding source for businesses
Whether you are a CEO or a small business who needs the financial support of a bank, choosing the best business financing is essential for your company's success. According to a 2003 report by Inc. Magazine, 88 percent of new companies start with at least some personal investment by the company's founder. Twenty-six percent pursued financing options either on their own or in conjunction with personal investments, while a 14 percent minority sought out investors or partnerships to start their companies. What's important about these numbers is not so much how these companies chose to finance their business but that they pursued the best financing for their individual needs. Every funding option offers its own risks, rewards, and trade-offs.
Debt Financing
The most popular form of external business financing is debt financing through banks or credit unions, usually in the form of a loan or line of credit. Before you pursue financing from a bank, you will need a business plan and financial forecast. The amount of money the financial institution is willing to loan you, and the interest rate they apply to your account, will be based on the amount of risk they apply to your company projections. The bank may also require collateral in order to offer you a loan.
Equity Financing
Equity financing takes several forms. You can involve partners in your business who will help absorb some of the start-up costs in exchange for shares in the company. You can also apply for financing from venture capitalists and angel investors. All types of equity investors will not only lend cash but will also provide support for your business. Because they own part of your company, they share in your success or failure. Be careful when giving away part of your business as you may need additional financing at a later date, which may require giving up more equity.
Bootstrapping
The term "bootstrapping" means raising business capital on your own, either from personal wealth or from family and friends. At some point, most business owners will self-finance. This does not mean you have to sell off all of your worldly possessions to start a business---savings, investments, assets, personal credit cards and home equity are options. Bootstrapping shows investors and bank managers that you are committed to the success of your business. By placing your own stake in the company's success, you may be more likely to get other sources of financing, too.
Grants
The U.S. Small Business Administration is a great place to start researching available grants. Although they do not offer grants themselves, the SBA maintains a database of available grants and provides assistance to small businesses. Search grants.gov, the government portal for federal grants. Grants are usually sector-specific. For example, the Department of Justice may offer startup grants specifically for companies in the criminal justice fields. Additional grants are often available for women, young entrepreneurs and minorities.
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