Venturize

Understanding financing sources

The financing options available today to a small business owner in need of cash can be overwhelming. Funding can come from almost anywhere: Traditional banks, credit unions, U.S. Small Business Administration loans, crowdfunding, online lenders and the list goes on. To make it easier for you to decide what makes the most sense for your business, we’ve identified the major lenders frequented by other small business owners, as well as some things to keep in mind about their loan products.

Credit Unions

Credit unions are not-for-profit organizations that range in size from small, volunteer-only operations to large entities with thousands of members. The basic business model is that members pool their money in the bank in order to be able to loan money to each other and achieve these financial benefits.

Small Business Administration (SBA)

The U.S. Small Business Administration (SBA) is a federal agency that helps entrepreneurs manage their businesses and gain access to capital. SBA loans have some of the lowest interest rates available, and some loans are available exclusive to small business owners.

Online-Only Marketplace Lenders

Marketplace lenders, one of the newest types of lenders, use online platforms to connect consumers or businesses seeking to borrow money with investors willing to buy or invest in the loan. Generally, these platforms handle all underwriting and customer service interactions with the borrower.

Mission-Driven Lenders (CDFIs)

Mission-driven lenders – sometimes called Community Development Financial Institutions (CDFIs) – are located throughout the U.S. CDFIs are certified by the U.S. Treasury Department and can be community banks, credit unions, nonprofit organizations, venture capital funds or loan funds.

Friends and Family

One viable funding option is to get your friends and family to invest in your business. Before requesting assistance, decide if you are requesting a loan from friends and family, or offering a share of your business. A loan requires repayment over time, while a direct investor takes an active role in your business decisions.

Banks

Banks are the largest small business lender and probably the first place you think about when getting a loan. They offer some of the lowest cost loans available, but it can be difficult to quality. About 72% of small business owners who apply get rejected. Banks usually require strong personal and/or business credit scores, a personal guarantee, collateral, and healthy financials.

Venture Capital

Venture capital is a type of equity financing that involves giving up a portion of the ownership of business in exchange for money from investors. Venture capital (VC) firms are usually organized as partnerships. They raise money from institutional investors, such as pension funds and endowments, which the VC partners then invest in promising startups.

Angel Investors

Angel investors are wealthy (accredited) individuals, often-retired entrepreneurs or executives that take an interest in startup investing. They often have a particular interest, such as technology or food ventures. Angels fill a critical gap between friends and family seed funding and venture capital, and typically take an equity stake, or debt that converts to equity.

Crowdfunding

Crowdfunding is a new and evolving fundraising alternative that marries social media and finance. With crowdfunding, entrepreneurs reach out to the “crowd”—typically their friends, customers, supporters and social network—for funding. The idea is that lots of smaller sums of money can take the place of one or two large investors or patrons.