Funding a Business

Topics: Debt, Loan, Venture capital Pages: 6 (2086 words) Published: June 13, 2013
"Funding a Business" Please respond to the following:
* Analyze funding opportunities for small businesses, including the role of the Small Business Administration (SBA). Then, evaluate the effectiveness of these funding opportunities in light of the current economy. Borrowing Money for Your Business

After you have developed a cash flow analysis and determined when your business will make a profit, you may decide you need additional funding. Borrowing money is one of the most common sources of funding for a small business, but obtaining a loan isn't always easy. The more money owners have invested in their business, the easier it is to obtain financing. Before you approach a lender for a loan, you will need to understand the factors the bank will use to evaluate your application. Types of Financing

There are two types of financing: equity financing and debt financing. Equity financing (or equity capital) is money raised by a company in exchange for a share of ownership in the business. Equity financing allows a business to obtain funds without incurring debt, or without having to repay a specific amount of money at a particular time. Most small or growth-stage businesses use limited equity financing. Equity often comes from investors such as friends, relatives, employees, customers, or industry colleagues. The most common source of equity funding comes from venture capitalists. These are institutional risk takers and may be groups of wealthy individuals, government-assisted sources, or major financial institutions. Most specialize in one or a few closely related industries. Debt financing means borrowing money that must be repaid over a period of time, usually with interest. Debt financing can be either short-term, with full repayment due in less than one year, or long-term, with repayment due over a period greater than one year. The lender does not gain an ownership interest in the business, and debt obligations are typically limited to repaying the loan with interest. Loans are often secured by some or all of the assets of the company. In addition, lenders commonly require the borrower's personal guarantee in case of default. This ensures that the borrower has a sufficient personal interest at stake in the business. Loans can be obtained from many different sources, including banks, savings and loans, credit unions, commercial finance companies, and SBA-guaranteed loans. State and local governments have many programs that encourage the growth of small businesses. Traditionally, banks have been the major source of small business funding. The principal role of banks includes short-term 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. SBA’s guaranteed lending programs encourage banks and non-bank lenders to make long-term loans to small firms by reducing their risk and leveraging the funds they have available. Small business administration. (n.d.). Retrieved from http://www.sba.gov/content/borrowing-money Bank lending to small firms rose from $308 billion in June 1994 to a peak of $659 billion in June 2008 but then declined by almost 18 percent to only $543 billion in June 2011. The author compared business lending by banks that received TARP funds (Troubled Assets Relief Program) and those that did not, and found that the decline in bank lending was far more severe to small businesses than to larger firms. For example total commercial & industrial (C&I) lending declined by 18 percent for large firms versus 20 percent for small firms. Among banks participating in TARP, the decline was even greater; small C&I lending declined by 31 percent and only 10 percent at non- TARP banks over the 2008–2011 period. Small business loans from banks receiving TARP funds grew more slowly than those from non- TARP banks (7.0 percent vs. 8.4 percent) and their allocation of assets to small business loans...
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