Looking for loans

The problem with borrowing money from a rich uncle for starting a business is that 1) the funds can be stopped at any time; 2) your uncle ordinarily can not provide the practical advice necessary for growing the business; and 3) your relationship with your uncle might be ruined if the business goes under.

Two alternate methods of looking for loans are as follows: SBA loans and venture capitalists SBA administers three separate, but equally important loan programs. SBA sets the guidelines for the loans while SBA’s partners (Lenders, Community Development Organizations, and Microlending Institutions) make the loans to small businesses. SBA backs those loans with a guaranty that will eliminate some of the risk to the lending partners. (www.sba.gov) The advantages of a SBA loan is that often it is usually easier to get a SBA loan as opposed to  a traditional bank loan and the SBA itself is an invaluable resource of information and classes about starting a small business.

Venture capital is money made available for investment in innovative enterprises or research, especially in high technology, in which both the risk of loss and the potential for profit may be considerable.  Venture capitalist finance startups in exchange for a share of stock once the company goes public.  Normally, financing is done in rounds.  For example, a company is given 12 million dollars and, once that money is exhausted, it applies for another round of financing.

Venture capital is mostly limited to high tech companies and is hard to obtain.  Only one in a thousand prospects presented before a venture capitalist actually gets funded.  Also, it takes time and money to make presentations to venture capitalists. Most venture capitalists are located in large metropolitan areas, such as Silicon Valley; hence, if you have a business located outside a large metropolitan area, you should factor in the travel time involved in contacting venture capitalists into your decision to use venture capital as a source of funding.  Also depending solely on venture capital for funding is risky because financing rounds are not guaranteed.  Your company may have to suddenly close down if you find that you have exhausted your round of financing without turning a profit.

“SBA Financing Basics” (n.d.).  Retrieved from http://www.sba.gov/financing/basics/basics.html

References