If you have plans to purchase real estate or large equipment for your business, then you are probably going to need a sizeable amount of money. Short-term financing options would not work well for these cases. For this type of situation, my best advice is to get a loan or think about taking on a partner who will provide equity instead of debt.
- Traditional commercial loans typically have higher collateral and credit requirements than an SBA-backed loan but might be able to be processed in a shorter amount of time since it doesn’t need the SBA to also sign off on it.
- SBA loans are not lent directly by the SBA. Instead, they are lent by the bank and then backed by the SBA. Since the SBA backs the loan (they step in in case of default), banks can relax the lending requirements for these loans. These loans were developed to give more entrepreneurs and business owners access to capital that they would not have been able to qualify for normally. Therefore, it is a good option to explore.
Both of these options are a form of debt. The great thing about debt is that debtholders don’t usually poke their noses into your business once they have given you the funds. The only time a creditor gets hot and bothered is when you stop making payments. At that point, they can force you into bankruptcy to sell off the assets needed to pay-off the debt owed to them. The other great thing about debt is that, once you pay it off, you don’t have to worry about making those payments anymore.
- Crowdfunding is a relatively new phenomenon. It was started to give entrepreneurs the ability to raise equity capital without having to solicit it only from their friends and family. It gives investors to the chance to contribute small amounts of funds into a pool that can grow large enough to eventually meet the needs of the business owner. So, it’s a win/win. Nobody stands to lose a lot, and if enough people contribute, then the business owner can raise enough capital to get things going. It’s also a good way to raise awareness of the product, so it doubles as marketing as well.
- Private investors are the more traditional way that entrepreneurs and business owners have raised equity capital historically. This option is similar to going on Shark Tank and getting one of the sharks to provide capital for you. However, many business owners might not make it to Shark Tank, and so, you have to look for investors from your circle of friends or family or through connections you make. In seeking a private investor, it’s a good idea to get someone who can help you make strategic decisions about the business or can even help with the day-to-day operations. The downside of this is that you have to be able to work well with them and be able to make mutual decisions.
The two equity options presented are great from a business owner’s perspective in that they don’t have to make payments to anyone contributing equity if the business does not have the funds to do so. This is probably one of the best reasons to use equity financing over debt. You don’t have to be sweating every month to make that debt payment. However, all that glitters is not gold. People who provide equity will typically have a say in how the business is run and will want regular reports to see how their investment is doing. You also have to share profits (if made) with them, or whoever owns their shares, for the life of the business unless you buy them out.