When trying to start a business one of the main things to consider is the source of capital. There are some options to be considered including securing a loan from lending institutions or private sources. To be able to raise $1 million dollars two options will be explored. These are private investors and Small Business Administration financing. This document seeks to explore the limitations and benefits of my two potential financial sources for the $1 million dollar business.
Private investors are critical for any new entrepreneur seeking to raise capital. Private investors are parties that agree to fund the business endeavor in exchange for part ownership of the enterprise. When seeking private investors, you are required to at least prepare and present a business plan that provides a financial forecast, objectives, and strategies of the business. The advantage of having private investors is that in addition to providing financial assistance, they can also provide expertise in that particular industry. Unlike banks, investors are less concerned with credit ratings or ability to repay. These investors are also more flexible in dealing with associated risks as compared to conventional lenders. Furthermore, since the investment is not technically a loan, there are no upfront repayments. Silent partners are not concerned with the day to day running of operations. One risk associated with having investors is that they can control significant equity in the business, therefore, limiting control. Their interests ultimately lie in return on their investments; the decision-making process will be slower trying to compromise on demands of all sides (Fabozzi et al., 2012).
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Another option is Small Business Administration financing which is especially useful when experiencing a hard time qualifying for loans. It has many benefits including receiving loans for projects that lack collateral. It should be noted that these are not direct loans rather guarantees of repayments made to lenders. Borrowers can benefit from lower deposit amounts with longer loan repayment terms. SBA also allows one to borrow up to an amount of $1 million dollars which has since been increased to $1.5 million dollars. Some of the risks associated with Small Business Administration financing is the requirement for personal guarantee if one owns more than 20% of the business. Another downside is that under the 504 loan program, financing is only offered for fixed assets excluding soft costs (United States, 2017).
Concisely, both SBA and private investors often allows borrowers to realize their dream business by gaining access to capital with low direct startup costs. With little no repayment to make, they can focus on growing the business with minimal pressure.
References
Fabozzi, F. J., & De, N. C. F. (2012). Project financing . London: Euromoney Institutional Investor PLC.
United States. (2017). An overview of SBA's 7(A) Loan Program: Hearing before the Subcommittee on Investigations, Oversight and Regulations of the Committee on Small Business, United States House of Representatives, One Hundred Fifteenth Congress, first session, hearing held March 9, 2017 .
