Small businesses, such as startups in the manufacturing, retail, service, and information technology sectors, have diverse financial requirements. Here are some frequently asked questions about small business financing.
1. Question: How Are Small Businesses Financed?
For established businesses, bank credit and owner investments are the two most commonly used types of financing. Newer firms rely significantly on outside debt, obtaining about 75 percent of their funding from banks through lines of credit, credit cards, and loans. Most small business financing comes from personal and business savings. Outside equity, including venture capital and angel investments, amounts to just six percent of newer firms’ funding. Capital demands vary extensively, and a notable number of established companies do not require outside financing.
2. Question: What Is the Forecast for Crowdfunding?
Terms of the Jumpstart Our Business Startups (JOBS) Act of 2012 allow the stock sales by startups and small businesses over the Internet, also known as crowdfunding. A small business can collectively raise up to $1 million annually. However, crowdfunding is not an option for small businesses until the Securities and Exchange Commission (SEC) declares final regulations.
3. Question: How Much Do Small Businesses Rely on Credit Cards?
While many small businesses rely on credit cards heavily, they only account for a modest share of total small business resources. Approximately seven percent of all startup funds are obtained from business and personal credit cards. In fact, credit cards are the third most attractive financing choice after bank loans and retained earnings.
4. Question: What Are the Reasons Small Businesses Seek Financing?
Small businesses seek backing for four primary purposes:
- Opening a business
- Acquiring inventory
- Strengthening the firm
- Expanding the company
Firms choose a variety financing methods depending on the intended objective.
5. Question: What Are Small Business Association (SBA) Loans?
SBA loans are government-backed loans offered by commercial lenders that adhere to SBA guidelines. SBA works with these institutions to contribute a partial guarantee for funding, providing the following benefits:
•Reduces lenders’ risks
•Increases small business lending capabilities
•Helps expand small business economic activity
Except for the disaster loan program that repairs the economic and physical destruction resulting from a declared disaster, the SBA does not loan directly to small businesses.
6. Question: Are There Other Federal Government Programs for Small Businesses?
Yes. For example, the Department of Agriculture’s B&I Guaranteed Loan Program is comparable to SBA loan guarantees. Likewise, the Department of Treasury’s Community Development Financial Institutions Fund promotes access to resources in rural and urban low-income areas. The Small Business Technology Transfer (STTR) and Small Business Innovation Research (SBIR) provide development and research grants and contract opportunities aimed at small businesses. These sources of risk capital help fund the development of new technologies. While the SBA directs the participating agencies in administering the program, it does not manage awards.
7. Question: How Are Startups Financed?
Startup capital for small businesses is mainly comprised of equity capital and debt. The average per new firm is approximately $80,000 annually. Startups rely equally on funds from bank credit and the owners’ cash resources. The most common source of startup funding is owners’ and families’ savings.
8. Question: What Types of Funding Do Entrepreneurs and Small Firms Use to Finance Their Ventures?
The two categories of funding are equity and debt. Some of these sources are unconventional or unique. Also, when a small business receives a government acquisition agreement, it plays a role similar to conventional financing, providing the momentum required for the firm to expand.
9. Question: What Industries Are Eligible for Small Business Financing?
Nearly any for-profit business is eligible for small business financing. Firms that are ineligible include those engaged in promoting religion, restricting patronage, providing crude sexual products, passive firms, illegal activities such as gambling and pyramid plans, and lending.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.