Identifying Funding Sources
Funding is a significant element in starting and operating a business, and it entails availing financial resources generally in money form or values such as time and effort to run the startup. In a bid to overcome the difficulties in business funding, entrepreneurs tend to source finances from external investors (Ingram, 2010). Insufficient working capital, inadequate assets, low personal wealth and the need to expand are some of the reasons why small businesses always seek for external funding options. However, there is a need to critically analyze the various funding options before considering any as a source of finance regardless the type of business that requires assistance. Choosing a source of funding is difficult because of the presence of a variety of funding options that all seem to be useful in case opted for by the firm (Ingram, 2010). An entrepreneur must understand the various factors to consider when choosing any funding option, explore the funding types and sources available, and then evidently find the best funding option.
Among others, the risk incurred when a source is decided, the cost of finance, repayment terms, and the financial requirements are the factors to consider (Ingram, 2010). Therefore, people in business must analyze the implication of each source to the entity analytically. The risk of using a financier involves identifying the effects of failure to meet the financial obligations of that source. The cost of finance requires one to find out the economic impact of all sources on the business based on their interests and fee structures. Repayment terms include determination of the period of the financing arrangement, the number of timely payments and the method of payment suggested by all sources. Financial requirements imply that one must be able to meet the criteria indicated in the source which include debt-to-equity ratios. Therefore, entrepreneurs must ensure that they comprehend the implications of the source on the business.
There are a variety of funding options for small businesses which include government grants, incentives, equity and debt financing (Feigenbaum, 2010). However, equity and debt options are the significant sources of finance for small businesses. The choice of a source depends on the financial needs of the company. Equity financing entails trading the business’ stock to an interested party who then attains ownership of the business or company. It means the company’s profits will be shared according to the ratio of ownership (Feigenbaum, 2010). Despite the loss of autonomy in the industry by the founder, equity financing is the most preferred financing because it provides higher credibility for the company and does not involve repayment procedures (Feigenbaum, 2010). Equity financing covers venture capital and angel investors.
Government grants help in ensuring a continued stay in operation and business expansion of small businesses. These are financial assistance offered by federal governments for start-up and small companies and they can either be non-refundable or loans (Wilson, 2011). Acquiring such grants usually involves extended application criteria; however, each program possesses unique conditions depending on the kind of business that needs financing. The nature of government grant financing of small business varies with states and nations (Ward, 2006). For instance, Canadian government funds a share of finances required by startups whereas the government of Israel provides funds to startups with a condition of staying within the country (Wilson, 2011). In the United States, the Small Business Innovation Research Grants are available to small businesses.
Debt financing is when an entrepreneur, practically borrows finances from lending institutions to fund the business. Usually, funds obtained through borrowing involve interest rates, which must be paid at a defined time (Hofstrand, 2013). The interest is the cost incurred by getting funds from a creditor. Different creditors have varying conditions in that; some attach valuable assets to cover the loan in case of failure of its settlement while others provide unsecured debts which require no collateral (Hofstrand, 2013). Debt financing also involves a repayment period, which is either short-term or long-term. People in business obtain short-term liabilities to fund business operations, and on the other hand, they acquire long-term debts to cover assets. Debt financing includes funds from bonds, commercial finance companies, banks and commercial lenders, and friends and family, and loans acquired through government programs like the Small Business Administration (SBA, 2018).
The SBA is an autonomous agency of the United States federal government that supports small businesses by giving out various types of financial assistance. It helps to preserve an open competitive enterprise so that entrepreneurs can be able to start and expand their activities (SBA, 2018). The agency offers loan programs to small businesses and sets rules for loans provided by guaranteeing-creditors (SBA, 2018). The agency issue credit through the 7(a) General Small Business Loans program, the 8(a) Business Development Program, the Microloan program, and the Export Loan programs. The 7(a) program is the most frequent program with a maximum loan amount of $5 million, a seven to twenty-five years repayment period and negotiable interests and fees (SBA, 2018). The 8(a) program helps small businesses compete in the market offering a manufacturing premium of $6.5 million, while goods and service account for $4 million. Also, small firms receive up to $50,000 as a loan under the Microloan program (SBA, 2018).
From the SBA website, loans, investment capital, disaster assistance, surety bonds and grants are the funding options and programs available for small businesses. The SBA indirectly finance finances companies by helping them to secure the loans from creditors. The agency enables easier access to loans. The SBA-guaranteed loans have competitive terms, ensure continued training on business startup and operation and include negotiable interests and fees (SBA, 2018). Moreover, the SBA license and regulate SBICs which invests in small businesses by providing starting capital to small companies. Through the surety bond, the SBA helps small businesses to acquire contracts from customers (SBA, 2018). SBA disaster low-interest loans help small businesses in case of physical damage of assets and economic catastrophes that affect the industry (SBA, 2018). The SBA does not offer grants but allows companies to have access to a variety of them.
The SBA program that should be applied is the SBA-guaranteed loan. The eligibility for small business to acquire an SBA loan is that it must be a for-profit business located and operating in the U.S with invested equity (SBA, 2018). The firm should also not be able to get funds from any creditor. Compared to the above conditions, the firm in question operates officially and legally in the U.S, and there is a failure to acquire funds from other financiers. For those reasons, an individual may not receive the required funds as he is not the one who invested in the business.
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Feigenbaum, E. (2010). Funding Options for a Small Business. Retrieved from http://smallbusiness.chron.com/funding-options-small-business-3174.html
Hofstrand, D. (2013). Types and Sources of Financing for Start-up Businesses. Retrieved from https://www.extension.iastate.edu/agdm/wholefarm/html/c5-92.html
Ingram, D. (2010). Factors to Consider when Choosing Methods of Financing a Business. Retrieved from http://smallbusiness.chron.com/factors-consider-choosing-methods-financing-business-1875.html
SBA.gov. (2018). The U.S. Small Business Administration. Retrieved from https://www.sba.gov/about-sba/what-we-do/mission
Ward, S. (2006). The Truth About Small Business Grants in Canada. Retrieved from https://www.thebalance.com/the-truth-about-small-business-grants-in-canada-2948493
Wilson, F. (2011). Financing Options: Government Grants – AVC. Retrieved from http://avc.com/2011/06/financing-options-government-grants/
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