Smart Small Business Financing
Starts With Knowing Where To Look

Finding small business financing doesn't have to be hard. But it requires more from you than an idea and a dream . . .

It is true: Small business financing requires more from you than hiring a good business plan writer. While there are many kinds of financing options that require a business plan, no matter how well they are written, business plans do not generate small business start-up loans or working capital financing.

In a struggling economic climate, the availability of small business credit contracts rapidly, making financing a small business a very challenging task. It takes great effort, creativity, and perseverance – and knowing where to look . . .

Where to Look for Small Business Financing

Where you look for money, and how you look for money, depends on your company and the kind of money you need. There is an enormous difference, for example, between a high-tech company looking for expansion funding and a local retail store looking to finance a new location.

Commercial Lenders

Commercial banks are the most likely source of small businesses financing, so they are where most entrepreneurs and business owners turn first. Contrary to popular belief, banks are not a good source for small business start-up loans, but they do much of the small business lending and administer and provide funding for small business loans backed by the U.S. Small Business Administration.

Banks are often criticized for their refusal to offer small business start-up loans, but they not supposed to use the savings from depositors on investing in risky business ventures. Regulators require banks to keep depositors’ money safe, making only conservative loans backed by solid collateral. In most cases, small business start-up loans are not safe enough to satisfy bank regulators and the businesses have little or no collateral.

If they don’t offer start-up financing, then how can banks be responsible for most of the small business lending?

Because entrepreneurs and business owners get most of the money they need from bank loans.

A great deal of small business financing is accomplished through bank loans based on the business owner’s personal collateral, especially a home. Some experts say that home equity has historically been the greatest source of small business financing.

Once a business has been around for a few years, it may have enough stability and collateral to persuade a bank to provide accounts receivable financing or an asset based loan backed by its inventory.

Venture Capital Funding

Sometimes disparagingly called “vultures,” venture capitalists are criticized both for their reportedly predatory business practices and for narrow mindedness because they seem to all fund similar kinds of businesses.

Neither is true. Venture funding is a business, and venture capitalists are business people who are charged with investing other people’s money. They are not supposed to take more risk than is absolutely necessary to produce the returns required by their investors.

Venture funding is rarely available for starting a small business unless there is an unusual combination of product innovation, market appeal, and proven management.  Start-up financing has to have a reasonable chance of spawning a rapidly growing company and producing an exceptional return on investment. So if you find yourself  wondering whether your new company is a candidate for venture funding, chances are, it probably isn’t.

You can find venture funding online. A couple of good sources are www.nvca.org, the Web site of the National Venture Capital Association and www.mavf.com, the site of Mid-Atlantic Venture Funds, a venture-capital firm in Bethlehem, PA. Check your library or the Web for Pratt’s Guide to Venture Capital Sources and The Directory of Buyout Financing Sources, both published by Thomson Financial Securities.

Angel Investors

Private loans and equity investments from so-called angel investors provide a great deal of funding for many new and existing companies. In the jargon of small business financing for start-ups, groups of investors are sometimes referred to as “doctors and dentists,” while individual investors are called “angels.” Many entrepreneurs turn to friends and family for angel financing.

Private lenders and angel investors can be hard to find. Professional business loan brokers in your area should know both how to find them and the types of businesses they are interested in financing. You may also find angel investors through your local Small Business Development Center (SBDC), the Small Business Administration (SBA) office in your area, and by searching online.

The Small Business Administration (SBA)

Without a doubt the most well known small business lending source is the U.S. Small Business Administration, which makes small business loans to existing firms and entrepreneurs starting a small business.

An SBA loan will generally be administered by a local bank (an SBA “certified lender”), which will handle the entire process from application to funding. And it can be a quick process at that, sometimes requiring less than a week for an SBA approval.

For small business start-up loans, the small business administration will normally require the new business owner to supply at least one-third of the initial capital.  And the rest – the amount loaned – must be backed by business or personal assets.

Asset Based Finance

Asset based finance is a widely accepted and popular alternative to traditional small business lending.

The most common type of asset based finance, accounts receivable financing, is used for cash flow management and working capital financing when business funds are tied up in receivables.

To illustrate, say your business sells to distributors that typically take 60 days to pay, and the outstanding invoices waiting for payment total $50,000. Your company might be able to borrow more than half, or $25,000, using an asset based loan or a new business line of credit.

Or you can use a related technique known as accounts receivable factoring. Factoring companies will purchase your invoices for as much as 98% of the face amount, advancing you up to $40,000 (or 80%) initially, with the rest forwarded when the invoices are paid. In many cases, the factor assumes the risk of non-payment, and handles the collection and accounting, as well.

Interest rates and fees may be relatively high, when compared to traditional small business loans, but accounts receivable financing is still often a good source of small business financing.

Purchase order financing is another asset based technique, but instead of receivables factoring, you finance orders from your customers. For example, if your company receives an order for $100,000, factoring companies will advance you a sum of money to purchase the materials and pay for labor to fill the order. When your finished product is delivered to your customer, you can sell the invoice to pay off the purchase order financing lien and collect your profit.


Most small business financing comes from the new owner’s home equity or savings at the beginning. Very few can attract either the interest or willing investment of outside sources. Your idea and business plan may both be good, but reliable small business financing remains dependent on hard collateral and guarantees, not the hopes and dreams of the business owner.