Business Financing Options
Financing the purchase or expansion of your business is different than financing your car or home. You will need a wide variety of documentation to present to your financial institution before they will approve your business loan. Additionally, the time that it takes to get your business loan approved is longer that getting a car or home loan. Generally, the three most common ways to finance your business is with conventional business loans, SBA loans, and investors. Most financial institutions on the average will only loan you 75% of your total project costs. For example: You want to purchase an existing business with a selling price of $100,000. You will have to come up with $25,000 of your own money and the bank will only loan you $75,000. Remember, this is an average only.
Conventional Business Loans
Conventional business loans are the most common type of business loan. The business owner needs to contact a bank or credit union to inquire about getting a loan. The loan officer will ask the business owner for their business plan and other items to process the loan application. If the loan officer believes that the business has the ability to repay the loan, the loan officer will forward the loan application to their finance/loan committee for approval. If the finance/loan committee approves the loan, the business owner should have their loan money in a few weeks.
A SBA Loan is obtained by going through your bank or credit union for a business loan. Generally, you will ask you financial institution for a conventional business loan and they may say no. However, they may still want to give you a SBA loan. The SBA will guarantee a percentage of the loan to the bank if the business owner defaults on the loan which is good for the bank. The disadvantage of a SBA loan to the business owner is three fold, additional costs for processing fees, additional paperwork, and additional time for processing the loan. The two most common types of SBA loans are 7a loans and 504 loans. Please consult your SBDC on which loan is best for your company.
Venture capital is a type of equity financing that addresses the funding needs of entrepreneurial companies that for reasons of size, assets, and stage of development cannot seek capital from more traditional sources, such as public markets and banks. Venture capital investments are generally made as cash in exchange for shares and an active role in the invested company. Learn more about venture capital.
What about the free money - Grants!
You may have heard from time to time that there are grants available for people who would like to start a business. Grants are extremely difficult to get for the small business. Most grants are offered to very specific organizations that are usually non-profit organizations who have similar missions as the granting agency. Be sure to check with the granting agency to determine availability of funds for specific grants prior to applying for the grant. The SBDC does not have access to any grant dollars for businesses. If you want to research potential federal grants, please go to: www.grants.gov.