If you are a small business owner in today’s economy, you may be wondering where you can find capital to help support the growth of your business or to source or manage working capital. Today’s blog provides an outline of sources of capital available to many small businesses, with more detail to follow in subsequent posts…
The SBA does not make direct loans to small businesses but rather sets the guidelines for such loans, which are then funded by its partners (lenders, community development organizations, and micro-lending institutions). The SBA guarantees these lending sources that a large percentage will be repaid (guaranteed by the govt.), thus eliminating some of the risk to the lending partners. SBA loans carry many pros and cons which will be covered in another blog.
Lines of Credit
A line of credit is essentially a credit account that can be readily accessible at the borrower’s discretion. Interest is paid only on money actually drawn down, although in some cases the borrower may be required to pay an unused line fee, often a percentage fee on money not drawn down. Lines of credit may be secured by several classes of assets including equity portfolios such as real estate, accounts receivable, or inventory. Controlling ownership in equity or stocks in the company is shielded but loan covenants can be onerous.
Cash Flow Lending
Cash flow lending is debt financing where a company’s expected cash flows act as collateral for the loan and primarily consists of senior term debt and subordinated debt. Lenders will consider a company’s historical cash flow characteristics, including the amount and stability of cash flows, as well as risks to future cash flows, in determining whether to lend and how much. This can be a very appealing source of capital for well established or larger companies.
Venture Capital / Private Equity
Venture capital and private equity capital may be available for the small business owner who anticipates significant growth and can clearly demonstrate a path to achieve it. Generally, the riskier and earlier-stage the company is, the more expensive the equity capital will be. With this source, there is no scheduled guarantee of payments on invested capital, thus allowing this lending source to require large (often times controlling) equity stakes and/or multiples of gross profit dividends before the “owner” sees any return. Venture Capital/Private Equity customarily deals with several millions of $$ and is not applicable to a “mom-and-pop” business model with slow to steady growth models.
Angel investors are typically high net worth individuals, or consortiums of high net worth individuals, with an interest in investing in early-stage companies and startups. These individuals can often be located through networking and local and regional entrepreneurship organizations and are normally structured via equity stakes or preferred dividends on profits. Angels have the ability to demand equity or profit concessions along the same lines as the Venture Capital / Equity groups but typically act as silent partners and not acting management.
I will go into much further detail in blogs to come with each source but wanted to make our readers aware of the many options of funding that are available and at what costs from a 30,000 foot viewpoint. Depending on your business, any one of these sources of capital could help take your business to the next level.