Opinion: A Guide to Financing a New Business

One of the biggest hurdles new entrepreneurs face is financing their business.

There are many sources of startup financing available that are not as difficult to attain as one may assume. The key is to find the right type of financing that will serve your specific needs. This includes determining exactly what you have, how much you need and what your responsibilities are to the lenders, as well as knowing how to use those funds wisely. A wrong move in any one of these areas could make the difference between success and failure for your small business.

Sources and types of small-business financing fall into a few broad categories. It will either be debt or equity financing from institutional or informal sources.

Debt financing is a loan you pay back. Common sources include family and friends, personal credit cards, home equity lines of credit, commercial bank loans and bank loans backed by the U.S. Small Business Administration.

Equity financing is an exchange of a portion of ownership in your business for cash or other assets. Unlike loans, you are not required to pay back the money, but these investors now own part of your business and will want a return on their investment. Venture capitalists work this way, and stock offerings are a type of equity financing.

Some small businesses also receive a type of funding from suppliers and vendors in the form of special payment terms, discounts or even direct loans. Suppliers want you to succeed because it means more business for them, so they are sometimes willing to help.

Other funding or cost-sharing options include partnerships, joint ventures, alliances, co-branding arrangements, peer-to-peer lending and crowd financing.

To learn more, the SBA and SCORE offer several financial assistance services for small businesses. Details about all SBA loan programs, including the popular 7(a) loan program, and other helpful information for structuring a financing strategy are posted at SBA.gov/services/financialassistance. Additionally, SpringfieldMo.Score.org is a resource to local volunteers who mentor and coach about aspects of starting a small business.

—John McKearney, SCORE mentor