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Financing Types

So you’ve tapped the bank – including your piggy bank – and you still need funds for your startup? Don’t worry. There are many avenues yet to explore. Consider, with great care and caution, the following sources of financing possibilities.

  • Angel Investors. These are individuals or groups of individuals, who are willing to personally finance your venture. There is generally a generous selection to choose from, and they are usually less formal in requiring financial paperwork – although a solid agreement is still necessary. They typically are looking for a fast, high return on their investment, and may demand some control over your business. Find an angel investor by asking for referrals from your accountants, attorneys or bankers, or at small business development centers, regional and state economic development agencies, or business schools and colleges.
  • Business Incubators. Business incubators provide programs designed to help businesses succeed, often including office space, access to equipment, management assistance, and access to financing and technical support.
  • The National Business Incubation Association offers a Find a Business Incubator locator that lists several business incubators in Pennsylvania.
  • Leading local business incubators include The University City Science Center and Ben Franklin Technology Partners.
  • Credit Cards. These are a good source of fast, low-hassle cash – if you have enough credit. But it can be also one of the costliest. The interest rates can be prohibitive, and on credit card cash advances they are even higher than the standard card rate. Rolling over credit card debt through “zero-interest promotions” is a popular strategy, but if these offers dry up, you could be stuck with a large balance.
  • Credit Unions. Many credit unions today are branching out to offer basic business services, such as business loans, business checking, credit-card transactions, and other services. They also offer lower interest rates for loans and credit cards. Membership is required, but even these rules have been relaxed lately.
  • Employees. Offering your employees a small percentage of the company or its profits may be a way to get them to invest in the business. It may also induce them to work harder, since they’ll have more to gain. Just don’t give away the store.
  • Friends and Family. One of the easiest ways to raise startup money, after self-financing, is to tap those around you: your friends, family, business associates, fellow employees, and so on. One potentially major problem, however, is that they may feel they have some control over your business and want to interfere. It’s important that even casual loan relationships such as these be cast in writing with solid contracts and agreements.
  • Microloans. Developed by the Small Business Administration (SBA), microloans are designed to provide very small loans – from as little as a few hundred dollars up to $35,000 – to small-business owners and entrepreneurs. The loans, however, are not available directly through the SBA, but through nonprofit community based lenders. Microloans are most often used by startup companies with lower capital requirements and limited credit histories. Interest rates tend to be higher than standard business loans, however.For more information, see Microloans at the SBA Web.Local Micro lenders, include:
  • Self-Financing. This is perhaps the easiest way to finance your business because there is no one else to answer to. Your resources might include savings and checking accounts, stocks, bonds and other investments, or the equity in your home (through a second mortgage or a home-equity loan, for example). You might even use your IRA or 401(k) plans; but it is important to first discuss this with your accountant, financial consultant or tax preparer. Using your home as collateral for a business loan is the riskiest of all, because if your business fails you could lose your home.
  • Seller Financing. If you are buying a business from someone who is retiring, or may not need the purchase money in a lump sum, you might consider the seller, or sellers, to finance all or some of the purchase. They’ll make more money over the long run in terms of principal interest. And you’ll have an advisor on standby who wants to protect their own interests.
  • Small Business Investment Centers (SBIC). SBICs are privately owned and managed investment funds that use their own capital, plus funds borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses. They are, however, licensed and regulated by SBA. And only companies defined by the SBA as “small” are eligible for SBIC financing – that is, when the company’s net worth is $18.0 million or less and its average after-tax net income for the prior two years does not exceed $6.0 million.For more information about SBICs, see Entrepreneurs Seeking Financing at the SBA website.
  • Venture Capital. Venture Capital Firms are private groups that generally loan money to startup companies with higher than normal growth potential, such as those involved in information technology, biotechnology or medical research. They tend to look for their returns in shares sold during an Initial Public Offering (IPO) of stocks or an outright sale of the company. As such, small businesses are not generally high on their list of prospects, but might be considered in special cases – especially those that match their avenues of return. The National Venture Capital Association website has a Resources for Entrepreneurs section that includes  templates of legal documents often used in venture capital transactions.