by Merlin Hernandez

Raising capital is the most basic of all business activities, but it is often a complex and frustrating process. Small businesses are challenged in two principal areas – they usually have a limited asset base, and there is no track record on which lenders can base decisions. Trade credits, credit cards, and factoring are important to startups to provide short-term funds for operational needs. But capital funding will often come from personal assets (including family and friends), equity financing/venture capital, or a line of credit from a commercial bank.

A valued source of venture capital is the SBA’s Small Business Investment Company (SBIC) Program. SBICs, licensed and regulated by the SBA, are privately owned and managed investment firms that use their own capital, as well as funds borrowed at favorable rates with an SBA guarantee, to make investments in small businesses.

These avenues for funding all have the benefit of providing business with the money it needs. But re-payment schedules can be applied before the business is ready to meet them. In some cases, the grace period may only be six months and the business may be forced to seek debt financing to meet re-payments. This requires a positive relationship with the finance market and is usually based on reputation or collateral. Small businesses may not meet these conditions in the short term and would need a loan guarantor.

Factors have been the salvation of many small enterprises where the fulfillment of sales contracts is facilitated by a loan to the value of receivables. But factors are known for high interest rates that tend to absorb profit margins, leaving the business with little returns to reinvest. This may force the entrepreneur to return again and again to the factoring option, and unable to use earnings to build equity.

While venture capitalists can satisfy large capital funding needs, they are normally heavily focused on loan recovery, with less regard for the long-term growth of the business. They can impose conditions that ignore owner vision, and limit operational scope. Many small entrepreneurs have described it as a feeling of having “sold their souls”. Trade credit, credit cards, and lines of credit are often preferred options because they are revolving funding channels that allow the business to maintain its autonomy, payment schedules are realistic, and terms are manageable.

Advertisements