2.06 – Other Ways to Finance Growth
Equity is not the only way to finance your business’s growth. Debt vehicles—essentially IOUs with interest—are another option for acquiring the necessary capital. When using this route, you typically offer business or personal assets as collateral for a loan with a market rate of interest. You pay back the principal and interest over time. Some arrangements, however, combine debt and equity. For example, a debenture is a debt instrument that can be converted to common stock at a predetermined future date. Meanwhile, the debenture holder receives interest on their loan to the company.
Here are some common sources of debt financing for growth:
Commercial Banks
Banks are better suited for providing growth capital rather than start-up capital because, by the time you approach them, your company has likely established a good track record. Banks evaluate loans based on the Five C’s:
- Character: The reputation and reliability of the entrepreneur.
- Capacity: The ability to repay the loan.
- Capital: The amount of money needed.
- Collateral: The assets provided to secure the loan.
- Condition: The overall financial health and situation of the entrepreneur.
For new ventures, character and capacity are the most critical factors.
Commercial Finance Companies
Also known as asset-based lenders, these companies are typically more expensive than commercial banks, often charging up to 5% above the prime interest rate. However, they are more likely to lend to start-up entrepreneurs than commercial banks. When weighing the difference between starting the business with higher costs and not starting due to a lack of funds, a commercial lender might be a viable option.
Small Business Administration (SBA)
For over 60 years, the SBA has provided various forms of financial assistance to small businesses, including grants, counseling, and loan guarantees. SBA loan programs help small businesses obtain funding when they cannot secure suitable financing through traditional means. The SBA does not directly lend money to small businesses but provides guarantees to banks and authorized lenders for loans made to qualifying businesses. This guarantee protects lenders by promising to repay a portion of the loan if the borrower defaults.
- Application Process: An SBA loan application is submitted through an authorized lender, not directly to the SBA. Not all lenders offer SBA loans, and authorized lenders may not provide all types of SBA loans.
- Program Changes: SBA programs frequently change based on current fiscal policy. Visit www.sba.gov/funding-programs/loans for the latest options.
By exploring these various debt financing options, you can find the right solution to support your business’s growth while managing financial risks effectively.
