Small business start up loans (also referred to as start up financing or franchise financing) refers to those loans which means by which an aspiring or current business owner obtains money to start a new small business, purchase an existing small business or bring money into an existing small business to finance current or future business activity. There are many ways to finance a new or existing business, each of which features its own benefits and limitations. In the wake of the recent financial crisis, the availability of traditional types of small business financing dramatically decreased. At the same time, alternative types of small business loans have emerged. In this context, it is instructive to divide the types of small business financing into the two broad categories of traditional and alternative small business loans options.
There have traditionally been two options available to aspiring or existing entrepreneurs looking to take loans their small business or franchise: borrow funds (debt Loan) or sell ownership interests in exchange for capital (equity loan).
The principal advantages of borrowing funds to finance a new or existing small business are typically that the lender will not have any say in how the business is managed and will not be entitled to any of the profits that the business generates. The disadvantages of debt financing include the following:
The required loan payments may burden the business, and the payments may be especially burdensome for businesses that are new or expanding. Failure to make required loan payments will risk forfeiture of assets (including possibly personal assets of the business owners) that are pledged as security for the loan. The credit approval process may result in some aspiring or existing business owners not qualifying for financing or only qualifying for high interest loans or loans that require the pledge of personal assets as collateral. In addition, the time required to obtain credit approval may be significant. The sources of debt financing may include conventional lenders (banks, credit unions, etc.), friends and family, Small Business Administration (SBA) loans, home equity loans and personal credit cards.
The principal practical advantage of selling an ownership interest to finance a new or existing small business is that the business may use the equity investment to run the business rather than making potentially burdensome loan payments. In addition, the business and the business owner(s) will typically not have to repay the investors in the event that the business loses money or ultimately fails. The disadvantages of equity financing include the following;
By selling an ownership interest, the entrepreneur will dilute his or her control of the business. The investors are entitled to a share of the business profits. The investors must be informed of significant business events and the entrepreneur must act in the best interests of the investors. In certain circumstances, equity loan may require compliance with federal and state securities laws. The sources of equity financing may include friends and family, angel investors, and venture capitalists.
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