What is a Small Business?
A small business is any type of business model that is privately owned and operated; all small businesses fall into the established federal size limitations that define what a small business is.
A small business, as defined by the Small Business Administration, employs fewer than 500 people; however, other forms of legislation that are meant to define a small business state that a small business may not operate with more than 15 people—these size limitations will vary based on what industry the underlying small business operates out of. In addition to the employee base, a small business may be classified based on its assets, the gross volume of sales or the amount of production.
Regardless of size limitations all small businesses, unless run by a wealthy entrepreneur, all small businesses need to secure financing to operate and produce their particular service. As a result, small business financing is arguably the most important aspect of a small business; without small business financing a particular small business would fail in staying afloat and achieving their long-term goals.
What is Small Business Financing?
Small business financing refers to the obtainment of money or funding that is invested in the small business to produce products, secure investment capital (such as machinery or construction equipment), pay employees, or pay for any function or expenditures in alignment. With the small business model. Small business financing can come in a variety of forms, but are typically delivered as loans.
Role of the Small Business Administration with Small Business Financing:
The Small Business Administration is the predominant government agency responsible for educating and providing assistance to small businesses. That being said, the Small Business Administration does not provide direct loans to owners of operators of small businesses. Instead, the Small Business Administration facilitates small business financing or loans that are obtained through financial intermediaries, such as banks, or credit unions.
Following facilitation, the Small Business Administration will store the loan in a portfolio to ensure that the borrower repays the institution in adherence to the loan agreement. Additionally, the SBA acts as the guarantor for the individual to secure this particular form of small business financing.
Types of Small Business Financing:
Borrowing money from family and friends: For the majority of entrepreneurs this form of small business financing is quite popular due to the fact that loved ones typically do not charge interest on the loan. That being said, this avenue of small business financing can be particularly damaging if the small business goes under and fails to provide a profit.
Small Business Loans: This form of small business financing is provided by banks, credit unions or other lending institutions. Similar to personal loans, small business loans will require additional interest payments and are subject to denial if the bank does not view your small business as a viable or profitable enterprise. As stated before, the SBA will act as your guarantor if you choose this route.
Small Business Grants: This type of small business financing is offered by government bodies throughout the United States. Typically those who start small businesses will be unable to secure government funding; however, small business grants are made available to those who are typically impeded from providing an innovative product or service to society—there is numerous small business grants made available to women or the disabled. The availability of small business grants is based on state and federal law; check with your local state department of labor to see if you are eligible for state funding.
Venture Capitalists: Small business financing can be obtained by other small companies or wealthy entrepreneurs. If your small business idea is viewed as worthwhile it will attract investments from venture capitalists or other individuals. Although these loans are more beneficial in regards to lower interest rates, they will typically require a percentage of ownership—which will necessitate a transfer of decision making authority–to be obtained by the investing party.