Types of Business Funding
In 2004, 55 percent of small business funding came from loans, credit lines, and capital leases; 46 percent came from personal credit cards; and 33.1 percent came from business credit cards. To add to these types of business funding, personal savings, grants, partnerships, and equity funding are available. The type of funding that a business owner chooses is determined by factors such as the nature of the business, operating history, and credit rating. Especially important, a business plan is the key to customized funding, as it includes a business’s financing strategy. Specifically described in a business plan are governmental assistance and loan guarantee programs that will be applied for, along with the plan for loan repayment. With this in mind, the various types of business funding are outlined.
Also referred to as owned capital, personal savings is one of the primary types of business funding for startups. The advantage of this funding source is that the business is not obligated to anyone but itself. The biggest challenge is the daily living sacrifices that an entrepreneur has to make to build the savings.
Grants are types of business funding that local governments and foundations give only to special businesses. Such businesses that are eligible for grants include nonprofit, “green”, agricultural, and women-owned businesses. The local government willingly gives to businesses of these types since they will help stimulate the local economy as they increase jobs and tax revenue. Also, most large corporations have foundations that give out grants to special businesses.
Partnerships involve the merging of businesses in the same field under a civil law contract. Business partners share profits and losses and also receive tax benefits.
Equity funding is tailored to business startups that are of a high-growth and technology nature. Two types of equity funding for small business startups include “angel investors”: huge net worth firms and venture capital firms. Venture capital firms invest in startup businesses in exchange for shared stock ownership and business involvement.
Debt Funding: Loans and Credit Cards
Business loans come in various forms that are either secured (involving collateral) or unsecured (requiring good credit rating). They include but are not limited to the following types of business funding:
- Small Business Administration Loan Guarantee Programs – are tailored to business startups, offering a long payback period of seven to ten years. Entrepreneurs are generally eligible for $50,000 to $1,000,000 with an interest rate of between seven to nine percent. The drawback is the detailed application process that is involved.
- Traditional Small Business Loans – are either secure or unsecured. The disadvantage is the rigid qualification process involved, as banks prefer lending to businesses with establishing operating histories. The loan amount is $50,000 and up, with the least expensive interest rate of six to nine percent. The repayment period is 1-5 years. Banks also give credit lines to business owners with good credit.
- Capital Leases – involve a borrower paying a finance company for equipment in installments. The payback period is between five to seven years with an interest rate of 12-18 percent.
- Credit Cards – Entrepreneurs use either personal of business credit cards for funding. Personal credit cards are more trusted than business credit cards because the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 only protects personal credit cards from deceptive practices such as confusing language, hidden fees, and rate increases.
On final note, the fundamental step to one of these types of business funding, particularly in the form of a loan, is by having a business plan that outlines the business owner’s repayment plan. An entrepreneur can consult with attorneys and accountants for referrals to business lenders. Especially noteworthy, over 80 percent of small businesses uses some form of funding to develop their businesses, according to the Small Business Administration.