Funding Sources for Small Business

Unfortunately, there aren't as many viable funding sources for small business as you might think. While it's certainly not impossible to obtain financing for your business, small business financing options are not as wide-ranging and available as one would imagine. I'm going to explain why...

Myth #1: If I give the bank my business plan, I'll stand a good chance of getting a loan.

The fact of the matter is that banks are in business to make money. Yes, loans are one of the many ways banks make money, but understanding how banks perceive risk will show you that the cards are stacked against small businesses, particularly startups. Here's an analogy...

Given the choice, would you rather lend money to someone you knew who could pay you back, or to someone who might not be able to, even though that person gave you their word? The answer is simple.

From the bank's point of view, lending to larger, more established businesses with greater assets poses a lower risk than lending to small business, particularly new ones.

That doesn't mean banks don't lend to small business. But since they they pose more risk, especially if the business is new or young, the bank will look to secure as much of the loan value as it can. In fact, it's not unusual for the bank to secure more than the value of the loan. That means they will expect collateral of personal property of some sort, such as a house you own. A good business plan is not enough - and most small businesses don't get too far in their quest for loans from banks.

We've been focusing on the risk facing banks...let's not forget the risk you take by guaranteeing your personal assets for a small business loan. Many small business owners fell to the statistics of failed businesses and ruined their personal finances as a result of extending personal guarantees to secure funding.

So while banks are one of many well-known funding sources for small business, you can't simply bank on them (no pun intended!) for a small business loan.

Myth #2: The SBA gives loans to small businesses

While the SBA is considered one of the funding sources available to small business in the USA, it doesn't actually lend directly to business. The SBA - short for Small Business Administration - instead guarantees a portion of  small business loans issued by certain lenders to encourage lending to small business. So should a borrowing business default on a loan, the lender's exposure to loss is minimized because the loan is backed by the SBA guarantee.

The SBA was set up by the federal government to encourage and assist small business ownership, and the initiative to guarantee a portion of the loan is a positive one.

However, SBA lenders will more than likely still insist on guaranteeing 100% of the loan value, if not more. So we come back to the same issue we have with banks - even if you can get a portion of a loan guaranteed by the SBA, you may still find that the lender won't approve the loan without an additional personal guarantee.

Also keep in mind that while the lender is supported with a guarantee from the SBA, you aren't. So, if you are indeed able to secure an SBA-approved loan and give a personal guarantee, your personal assets are still exposed if you default on the loan.

Myth #3: Venture Capital is readily available to small businesses

Venture Capital firms focus on relatively few investments, and tend to look more towards larger private companies with strong growth potential than they do small business. Venture capital firms are interested in investments they can exit within a few years and profit from. This means taking a company public or pushing a company into a merger or acquisition is more attractive than startups.

It's safe to say that venture capital firms should not be considered as one of the funding sources for small business.

Why FundingUniverse.com may be one of the best funding sources for small business today.

FundingUniverse.com is a not merely a matchmaking service for angel investors and business owners. Yes, it does match angels to entrepreneurs, but it takes things a step further. It helps entrepreneurs identify weaknesses in their business plan, pitch and presentation. Then, working with entrepreneurs, it helps them overcome these weaknesses and match them to ideal investors. According to the Center for Venture Research, 98% of investors are unsuccessful in their bid to obtain funding.

FundingUniverse.com may be your best opportunity, and is one of the best funding sources for small business made available through the power of the internet.

Registration to FundingUniverse.com is free.

Back to Funding for Starting a Business Page from this Funding Sources for Small Business Page