Small business financing (also referred to as startup financing or franchise financing ) refers to the means used by a prospective or current business owner to earn money for starting a new small business, purchasing a small business existing or bring money to existing small businesses to finance current or future business activities. There are many ways to finance a new or existing business, each with its own advantages and limitations. After the 2007-08 financial crisis, the availability of traditional small business financing varies dramatically. At the same time, alternative types of small business financing have emerged. In this context, it is instructive to divide the types of small business financing into two broad categories of financing options for traditional and alternative small businesses.
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Traditional small business financing options
Traditionally there are two options available to existing candidates or entrepreneurs who want to finance their small business or franchise: borrow funds (debt financing) or sell stock ownership in exchange for capital (equity financing).
Debt financing
The main advantage of borrowing funds to finance a new or existing small business is usually the lender will not say anything about how the business is managed and will not be entitled to any profit generated by the business. The disadvantage is that payments can be very burdensome for a new or growing business.
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- Failure to make the necessary loan payments will risk asset seizures (including the possibility of the business owner's personal assets) as collateral for the loan.
- The credit approval process may result in some prospective or existing business owners not eligible for financing or simply qualify for a high-interest loan or loan that requires a guarantee of personal assets as collateral. In addition, the time required to get credit approval may be significant.
- Excessive debt can weigh on business and end up at risk of bankruptcy. For example, businesses that carry heavy debt loads may face an increased risk of failure.
Sources of debt financing may include conventional lenders (banks, credit unions, etc.), friends and family, Small Business Administration (SBA) loans, technology-based lenders, micro lenders, home equity loans and personal credit cards. Small business owners in the US borrow, on average, $ 23,000 from friends and family to start their business.
Business loan duration varies and can range from one week to five years or more, and the speed of access to funds will depend on the internal process of the lender. Private lenders are quick on turnaround and in many cases can complete the payment on the same day as the application, while the traditional big banks can take weeks or months.
Equity financing
The main practical advantage of selling interest in ownership to finance a new or existing small business is that a business can use equity investments to run a business rather than making potentially costly loan payments. In addition, business and business owner (s) usually do not have to pay the investors if the business loses money or ultimately fails. Losses from equity financing include the following:
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- By selling ownership, the entrepreneur will dilute his/her control of the business.
- Investors are entitled to a share of the business profits.
- Investors should be informed of significant business events and entrepreneurs must act in the best interests of investors.
- Under certain circumstances, equity financing may require compliance with federal and state securities laws.
Equity financing sources can include friends and family, angel investors, and venture capitalists.
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Rollover pension fund to start or finance a business
A less well-known but established way for entrepreneurs to finance new or existing businesses is by diverting 401k, IRA or other pension funds into a franchise or other business venture. This financing option is often called "Rollover as business startup" or "ROBS" financing. This is not a loan: on the contrary, business owners form C Corporation, which sponsors a profit-sharing plan. From there, business owners use corporate retirement plans to buy shares from their own companies, thus contributing to corporate finance.
This small business financing option allows business owners to benefit from debt and equity financing while avoiding losses such as burdensome debt payments. More than 10,000 entrepreneurs have used their pension funds to finance their initial business.
The IRS has made it clear that the use of pension funds to finance small businesses is not "per se" disobedient. ROBS financing is complicated, however, and the IRS has developed a set of guidelines for ROBS financing. It is therefore important to hire experienced professionals to help with this small business financing strategy.
New sources of debt and equity financing
Amid the decline in traditional small business financing, new sources of debt and equity financing have increased, including Crowdfunding and Peer-to-peer loans. Unless a small business has collateral and can prove income, the bank hesitates to lend money. Often starting a company and a business that operates for less than a year has no guarantee and the lender of personal money or angel investors is a better option. Private money lenders and angel investors are willing to take on more risks than banks that recognize potential profits. Private lenders can also reach decisions more quickly with consent only through one level rather than be ignored by many levels of management.
See also
- Merchant down payment
References
Source of the article : Wikipedia
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