Small businesses and entrepreneurs have traditionally been challenged with financing their ventures. Often they rely on their own pocketbooks or those of their relatives to fund their vision.

These days it seems there are more sources than ever for securing much-needed cash. Banks are offering greater lines of credit aimed at small businesses, as are credit card companies.

With any access-to-capital decision, caution must prevail. The secret is weighing the pros and cons of each option before deciding on the right opportunity. Beyond family, friends, banks, and credit cards, here are three funding avenues to consider.

Help from Uncle Sam

Several government agencies offer grants to small businesses and private organizations. Grant assistance is typically directed to specific projects or nonprofit endeavors, however.

Federal and state loans are also available, most notably from the U.S. Small Business Administration (SBA). The SBA acts as a guarantor of loans made by private institutions and others, and it offers several loan programs.

• Basic 7(a) Loan Guaranty. SBA’s primary business loan program helps qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It’s also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes. Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation, and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets.
  
  
• Certified Development Company (CDC), a 504 Loan Program. Provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Typically, a 504 project includes a loan secured from a private-sector lender with a senior lien, a loan secured from a CDC (funded by a 100-percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower.
  
  
• Microloan, a 7(m) Loan Program. Provides short-term loans of up to $35,000 to small businesses and not-for-profit child-care centers for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery and/or equipment. Proceeds cannot be used to pay existing debts or to purchase real estate. The SBA makes or guarantees a loan to an intermediary, who in turn makes the microloan to the applicant. These organizations also provide management and technical assistance. Microloans are not guaranteed by the SBA and are only available in selected locations and states.

Money from angels

Angel investors are private wealthy individuals interested in using their own money to fund companies, usually in their start-up stages. Many angels are former entrepreneurs themselves. In exchange for their investments, they receive an equity share of the business.

Angels make investments to gain a return on their money, to participate in the entrepreneurial process, and often to give back to their communities by catalyzing economic growth. They get a return on their investments when the entrepreneur successfully grows the business and exits it, generally through a sale or merger.

Because angels tend to invest in companies located near them regionally, companies can usually identify candidates by networking within their communities.

Cash from venture capitalists

With an innovative business model and an aggressive business plan for growth, it’s possible to attract the interest of venture capitalists.

Unlike angels who invest their own money, venture capitalists invest funds from other sources like pension funds, insurance companies, or foundations. They generally make larger investments and do so throughout the stages of the business.

They also expect equity in the business, along with hands-on influence, including board seats and in-house management positions. Entrepreneurs seeking venture capital should understand that they are essentially selling part of the business and must be willing to surrender some control in exchange for funds. 

Ready to take your business to the next level? Wipfli can help you analyze your funding options from all angles. For personalized assistance, contact your nearest Wipfli office location.