The past few years have been difficult for small businesses, to be sure. With the economic downturn, sales have been slower and growth has been halted in many industries. Further, the credit crisis of 2007-2008 has made financing a business even harder. Fortunately, the years ahead look promising for small business financing. Below are the leading ways to secure financing for a small business:
Angel Investing & Venture Capital
Angel Investing is the process whereby a wealthy individual provides funding to a company in exchange for equity and sometimes debt as well. There are professional Angel Investors, or the could simply be an acquaintance of the entrepreneur. Venture Capital is largely the same process, but on a larger and more sophisticated scale. Usually, venture capital firms create “funds” from investors that they use to invest in young companies or startups. While Silicon Valley is notorious for getting the lion’s share of venture capital, there are also many VC firms and individual Angel Investors that work in industries other than technology and are based outside of Silicon Valley. For a new and unproven business, it’s virtually impossible to secure bank financing (see below) and venture capital or angel investing are the idea choice for a young startup.
As mentioned, bank lending was been tough on businesses during the credit crisis, and it’s still very difficult to find easy credit available in the financial markets. However, for businesses in strong financial positions, with plenty of assets, lending is starting to gain momentum once again. The Small Business Administration, see below, can make a major impact in the availability of credit for small businesses.
SBA Loan Programs
The Small Business Administration doesn’t directly make loans, but they guarantee bank loans for qualifying enterprises. This has a number of benefits. The added security to the lender makes the terms and interest rates much more favorable for the business. In 2012 and beyond, SBA Loan Programs should see strong activity.
These are the primary formats of securing financing for a small business, but there are many others (including combinations of the above), and all available options should be considered by the business or entrepreneur before making a final decision on how to finance the business. Typically the best financing choices are as follows: Angel investing (for a brand new idea), venture capital (for a growing startup), SBA loans (for young but thriving businesses) and traditional bank loans (for the mature and growing company).