Frequently Asked Questions About FinancingWhat is the difference between debt and equity?
Debt involves money that is available to a business that the borrower is obligated to pay back to the lender over a specified period of time. Lenders will be primarily concerned about the business’s ability to re-pay the debt that is owed and any interest that is accrued. Companies that are seeking debt need to be able to prove to a potential lender that the business is profitable.
Equity can be used to finance businesses activities when debt is not available. For many start-up companies that do not have a proven track record, obtaining seed capital or other equity funds can be an option. This involves acquiring an investor who will provide assets in exchange for an ownership stake in the business. Unlike debt funding, equity funds do not need to be re-paid. Because the original owners will have a diluted ownership stake of the business, this also often results in a loss of control of the direction and the activities of the business.
Where should I begin to seek funding?
It depends on the stage your business is in. All businesses should be able to identify activities that need to be financed. Banks are often the primary source of funding, although many companies will not qualify for traditional bank loans.
Is there funding available for start-up companies?
Funding for start-up companies is often the most difficult to find. Start-up loans are sometimes made to companies, although these are typically for very small amounts (under $50K) and are usually extremely competitive. Often to fund its initial activities, new businesses must rely on the owner’s personal savings or on acquiring private seed money from one or more sources.
My bank has declined my request for funding. Where do I go next?
Find out why your bank feels uncomfortable with your request and see if there is something in the business model that can be changed. Requests for funds are rejected for a number of different factors, such as either weak financials, lack of experience, or projections that are unreasonable. A good bank will continue to try to work with you to find solutions and get you to the point where your business is bankable.
Other non-traditional, community-based lenders may provide potential solutions; however, these also work under specific guidelines that determine whether they are able to provide funding.
Are there grants available for my business?
Grants typically do not exist in the form of money that is provided directly to a for-profit business without having to be re-paid. There are programs that exist where a government or non-profit agency will receive federal grant money and have the ability to lend those funds to businesses that meet specific goals.
Does the government lend money to small businesses?
Federal and state governments typically do not lend funds directly to businesses. Most assistance available from government sources comes in the form of credit enhancements that include guarantees or incentives made to a lender that support its ability to work with businesses.
If a loan carries a government guarantee, why would a bank deny my request?
Most government-backed loans are not fully guaranteed and will still carry a small percentage of risk to the lender. Even if most of the loan is guaranteed (in many cases up to 90%), lenders will be hesitant to distribute funds if they feel that the business has not proven its ability to service its debt. Banks would prefer to lend to businesses that are proven to be capable of fully repaying a loan, rather than collecting on a government guarantee that is less than what is owed to them.
What are the most important factors in seeking lending for my business?
There are several important factors. The most conservative lenders will always want to see a proven business model based on current and past financial statements. Credit scores, credibility and character of the ownership and management team are important, as is a strong, believable, well-designed business plan.