As the old adage says, it takes money to make money. And for those interested in starting a small business, it rings true. Just about any type of business venture requires access to a certain amount of startup capital, so it makes sense that access to capital is a chief concern among entrepreneurs.
However, gaining access to capital is not just on the priority lists of startup owners. Those who own established businesses also need access to funding in order to grow and expand, weather hard times, or purchase expensive, but necessary equipment.
Fortunately, there is more than one way for businesses to gain access to capital. What are they, and what are the pros and cons associated with each?
Loans guaranteed by the United States Small Business Administration (SBA) can be an excellent option for small-business owners. Because the SBA guarantees a portion of these loans, banks are able to grant more favorable terms to small-business borrowers with limited credit histories.
That being said, the process of qualifying for an SBA loan can be quite complex and cumbersome. Plus, many of these loans have variable interest rates, often prime plus a certain percentage. So what is an affordable loan today might end up being less so in a few years time, should interest rates change.
Friends and Family
Borrowing money from those closest to you is a very common means of acquiring business funding. Because those who are familiar with you and your personal integrity are likely to base their lending decisions more on their desire to see you succeed, and less on your personal or business credit rating, the application process will not be nearly as rigorous at what one would encounter when applying for a bank loan.
But, when borrowing from those with whom you have a close personal relationship, you run the risk of doing permanent damage to those relationships should the business go belly-up. Therefore, business owners should make sure their friends and family financiers are fully aware of the risks involved before they make the decision to put their personal assets on the line.
Angel investors can take a business from small-time to household name. Not only that, but they tend to be knowledgeable in the industry in which they are investing, and their experience can be a valuable asset to the businesses fortunate enough to be a beneficiary.
However, they generally expect a substantial share in the business in exchange for investing their capital. Plus, they may want to take an active role in the business’s management. So, business owners who are intent on maintaining full ownership and control of their business ventures may want to think twice before seeking out the assistance of angel investors.
Bank loans grant business owners access to the capital they need in order to address their business’s startup needs, or to fund expansion. Plus, once the loan has been granted, business owners are free to run their businesses as they see fit.
Business owners should be aware, though, that qualifying for a business loan from a bank requires a solid business credit rating. Banks also like to see that new business owners have a solid business plan in place, and the personal credit rating and collateral necessary to secure their business loans.