Small Business - Sources of Funding

Sources of Funding

Small businesses use several sources available for start-up capital:

• Self-financing by the owner through cash, equity loan on his or her home, and or other assets.
• Loans from friends or relatives
• Grants from private foundations
• Personal savings
• Private stock issue
• Forming partnerships
• Angel investors
• Banks
• SME finance, including Collateral based lending and Venture capital, given sufficiently sound business venture plans

Some small businesses are further financed through credit card debt—usually a poor choice, given that the interest rate on credit cards is often several times the rate that would be paid on a line of credit or bank loan. Recent research suggests that the use of credit scores in small business lending by community banks is surprisingly widespread. Moreover, the scores employed tend to be the consumer credit scores of the small business owners rather than the more encompassing small business credit scores that include data on the firms as well as on the owners. Many owners seek a bank loan in the name of their business, however banks will usually insist on a personal guarantee by the business owner. In the United States, the Small Business Administration (SBA) runs several loan programs that may help a small business secure loans. In these programs, the SBA guarantees a portion of the loan to the issuing bank and thus relieves the bank of some of the risk of extending the loan to a small business. The SBA also requires business owners to pledge personal assets and sign as a personal guarantee for the loan.

The 8(a) Business Development Program assists in the development of small businesses owned and operated by African Americans, Hispanics, and Asians.

Canadian small businesses can take advantage of federally funded programs and services. See Federal financing for small businesses in Canada (grants and loans).