From the U.S. Small Business Administration

Debt Financing

There are many potential sources for debt financing.  Banks, savings and loans, commercial finance companies and the U.S. Small Business Administration (SBA) are among the traditional sources. 

Over the last decade, the growing recognition of the contributions small firms make to the economy has stimulated the development of an increasing array of programs offered by state and local governments.

There is another important source for financing frequently overlooked by small business owners and prospective entrepreneurs.  Family members, friends, and former associates are a potential financing source, especially where the capital requirements are smaller.

Traditionally, banks have been the major source of small business funding.  Their principal role has been as a short-term lender offering demand loans, seasonal lines of credit and single purpose loans for machinery and equipment.  Banks generally have been reluctant to offer long-term loans to small firms.

The SBA guaranteed lending program provides banks (and non-bank lenders) with the incentive to make long-term loans to small firms by reducing their risk and leveraging the funds they have available.

Whether pursuing a loan from a traditional lender or an SBA lender, prospective borrowers should be equipped with a business plan, profit and loss statements, tax returns for the last three years and a current balance sheet, and should be able to articulate the need for the loan and demonstrate the ability for repayment.  Evidence of strong management is another plus.

These requirements will vary if one business is a start-up compared to an existing business.   Established businesses are expected to provide one-third of the equity injection, while the requirement for start-ups could be 50 percent or more.

In addition to the equity injection, lenders commonly require the borrower's personal guarantees to protect the lender in case of default.  This ensures that the borrower has a sufficient personal interest at stake to give paramount attention to the business.  For most borrowers this is a scary, but inherently necessary disposition. 

What Do You Turn To? 

The search for financing is similar to any other aspect of your business in that it takes time and effort to research the sources right for you.  Examine your needs, plan how the funding will be utilized, and study what is available.  The ability to secure sufficient funds to start and grow your business depends strongly on your preparation and demonstrated capacity to manage those funds efficiently and effectively.

Publication of the U. S. Government, which is not eligible for US copyright protection.