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Develop a list of sources of financing for a small business - Essay Example

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While equity financing refers to the selling of a business’ stock to a buyer who then owns the sold portion of a business, debt financing refers to…
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Develop a list of sources of financing for a small business
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Develop a List of Sources of Financing for a Small Business of Introduction The sources of finance for small businesses could be categorized into two major classes namely equity and debt financing. While equity financing refers to the selling of a business’ stock to a buyer who then owns the sold portion of a business, debt financing refers to borrowed loans, usually by means of a promissory note (Burk & Lehmann, 2006). This paper lists and describes some of the common sources of financing for small businesses.
Sources of Small Business Financing
The first source of small business financing is personal contribution to a business, which is perhaps the easiest and simplest method to finance a business. In this source, a proprietor uses own savings or borrows or sells a personal item such as bonds, mutual funds, stocks, or real estate to fund his/her business. In addition, one may use home-equity line of credit to finance own business. Furthermore, one could give loans or merely contribute money to own business. The other sources of contribution include family and friends with access to more cash than the proprietor does. The second sources of finance for small businesses are banks. In fact, in current times, banks have become quite instrumental not only in supporting already established small businesses but also in giving start-up loans for new small businesses (Burk & Lehmann, 2006). Unfortunately, banks have quite cumbersome conditions to be met before small business loans are approved. For instance, banks have to establish the credit worthiness of the borrowing business of person, more so with regards to a business’ money-making history. That is, commercial banks would want to be assured that the loaned will be able to repay the lent sum plus the interests therein. It is thus imperative that the person seeking a loan from a bank draws up a good business plan in addition to the collateral against which the loan is to be given. If not, the borrower must have a guarantor or a cosigner who must satisfy the bank that he/she will repay the loan if the borrower fails to pay.
Venture Capital Firms is the other common source of financing for small business. These firms give funds to small businesses considered and believed to have outstanding growth potential. On a rather negative note, quite a few small businesses are financed by venture capital firms. Being financed by venture capital firms is significantly unlike getting financed by bank loans. In fact, venture capital lenders have a right not only to the repayment of the capital but also on the interest earned by the loan, notwithstanding the profits or losses/failure incurred by the supported business (Ante, 2008). In addition, venture capital firms invest money in a business in exchange for ownership stake in the said business. Hence, the venture capital firm’s return is proportional to the profitability, performance, and growth of the business. However, these benefits are collected when the venture capital firm exits a business it invested in through the selling of its shares. The four main stages of small business development that venture capital firms assist in include the generation of business ideas, the starting of a business, the ramp up, and the exiting of a business (Ante, 2008).
The other important sources of finance for small businesses are government-sponsored financing programs. There are numerous government programs, which offer financing to small businesses including the Small Business Technology Transfer (STTR), the Small Business Administration (SBA), Small Business Investment Companies (SBIC), and the Small Business innovative Research (SBIR). In particular, the SBA is quite helpful in financing small businesses via its many loan programs, which target specific purposes. For instance, the 7(a) Loan Program finances businesses with special requirements such loans for businesses that deal with exports and those based in rural areas (U.S Small Business Administration, 2012). Similarly, the Microloan Program gives small and short-term loans to small business concerns and not-for-profit child-care organizations.
Conclusion
Compared to large businesses such as multinationals, small business are easier to finance. Among the more direct sources of finance for small businesses are personal loans, contributions, family/friends’ contributions. Venture capital firms have also assisted small businesses to a large extent in current times. Nonetheless sources of funds such as banks require collateral or guarantors to give loans to small businesses.
References
Ante, S. E. (2008). Creative capital: Georges Doriot and the birth of venture capital. Cambridge, MA: Harvard Business School Press.
Burk, J., and Lehmann, R. (2006). Financing your small business: from SBA loans and credit cards to common stock and partnership interests (quick start your business), first edition. Sourcebooks.
U.S Small Business Administration (2012). “SBA Loans Programs.” SBA.GOV. Retrieved on August 17, 2012 from http://www.sba.gov/category/navigation-structure/loans-grants/small-business-loans/sba-loan-programs Read More
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