Financing a Small Business

Where You Need a Lawyer:

(This may not be the same place you live)

At No Cost! 

 How Can I Finance My Small Business?

What is considered a small business may vary greatly. Generally, a small business is a business that is privately owned and operated and has less than five hundred employees. 

A small business may also be defined by a relatively low volume of sales. The standards for a small business in the United States vary by state and by industry.

Small businesses are becoming more popular due to their relative ease of operation and available tax deductions. Other examples of reasons small businesses are becoming more popular include:

  • The amount of creative flexibility an owner can exercise;
  • The amount of control over the owner’s work-life balance;
  • Financial independence; and/or
  • Starting incentives, including financing options.

For businesses in the manufacturing industry, a small business employs less than five hundred employees. For businesses in non-manufacturing industries, the criteria for a small business is typically less than $7 million in annual income.

Small businesses usually are formed as corporations, partnerships, or sole proprietorships. Another common name for them is a startup

A startup refers to a business that recently began operations and is operated on a smaller scale until it has enough revenue to move forward. A startup business is a business that expects to grow quickly. This type of business is common in the technology industry.

The biggest hurdle an individual will likely face when starting their small business or startup is coming up with the money they need to establish and maintain their business operations. Coming up with this money, known as capital, is a crucial component in the success of a new business.

If an individual does not personally have the capital they need to start their business and they cannot borrow the funds from a family member or a friend, there are several financing options that may be available to them.

Financing for a small business may take many forms, and is largely influenced by the type of business that is being started. According to the Office of Advocacy for the United States Small Business Administration, in 2018, personal and family savings accounts were the most common sources of financing for small businesses.

Other common funding options for small businesses include:

  • Obtaining a commercial loan;
  • Partnering with investors;
  • A business credit card issued by a bank;
  • Applying for a government program for small businesses; and
  • Crowdsourcing funds, such as through online fundraising platforms.

Government lending programs for small businesses are available at both the state and federal levels. These programs are intended to reflect the important role small businesses play in strengthening the economy of the United States. In addition, these programs are used to promote the start of new businesses and promote the growth of small businesses already operating. 

What are Venture Capitalists?

A venture capitalist is a private investor who provides funds, or capital, to companies that have high growth potential in exchange for equity in the business. If the business is successful, the venture capitalist stands to gain a large return on their investment.

Although many venture capitalists hesitate to invest in startup companies, they may invest if they believe the company may be successful in the future. A venture capitalist seeks to invest for a short period of time, typically 3 to 5 years. 

A venture capitalist is a great potential source of capital. However, they often desire to play a role in the oversight or management of the companies in which they invest, which may or may not be something the business owner wishes to occur.

What are Commercial Loans? 

A commercial loan is often appealing when an individual starts up their business because, unlike a venture capitalist, the bank will attempt to play an active role in the company’s affairs. If the small business or startup owner has a significant number of personal assets, they may have no issues qualifying for a commercial loan for their business. 

It is important to note, however, that a bank typically examines the past performance of a business instead of its potential. Because of this, it may be more challenging for a startup to obtain a commercial loan.

What is Asset-based Financing?

Asset based financing is a type of financing that is becoming more popular as a means to finance a small business. With this type of loan, the lender accepts the assets of the new company, such as the accounts receivable, as the collateral for the loan.

What are Government Lending Programs?

Government lending programs are provided by government entities to find business. There are several state and federal loan organizations which are designed to promote new business growth. These organizations may fund a new business directly or they may serve as a liaison between the small business owner and the lender.

One example of a government lending program is the 7(a) loan program provided by the Small Businesses Association (SBA). This type of loan is the SBA’s primary method of assisting small businesses in the United States.

When a small business obtains a loan under this program, the SBA guarantees a portion of the loan amount. This type of guarantee from a government agency assists the business in acquiring funds, even if the business would not otherwise have qualified for a business loan.

A 7(a) loan is a catch all term which refers to more than six different types of SBA 7(a) loans. Each different loan addresses different needs and different businesses. 

7(a) loans may vary in the loan amounts, SBA guarantees, and other loan term details. These loans are provided to encourage fair loans to businesses which may not have otherwise been able to obtain funding that included reasonable terms and conditions.

What is the Small Business Administration (SBA)?

The Small Business Administration (SBA) is a government organization that can assist business owners in securing loans for the capital required to get their business up and running. It is important to note that the SBA does nor directly loan money.

The SBA, instead, assumes the risk of the borrower’s non-payment and, therefore, makes private lenders more willing to loan funds to new business borrowers. In order to obtain assistance from the SBA, a small business must show:

  • Conventional financing is not available to the business with reasonable terms, such as the interest rates are too high;
  • There is a reasonable assurance that the business will be able to repay the loan; and
  • The loan is for an appropriate business purpose.

What if My Business is Being Affected by COVID-19?

There are special government programs that are available for businesses that have been affected by COVID-19. The Paycheck Protection Program (PPP) of 2020 is a 7(a) loan that is designed to help small businesses that are affected by the ongoing COVID-19 pandemic.

The PPP was reopened in 2021 and includes new loan availability as well as additional funding for a business that is currently receiving a PPP loan. The program may also be extended as the pandemic continues.

What Type of Financial Assistance is Available for Small Businesses During the Pandemic? 

There are several options for financial assistance being provided for small businesses during the pandemic. For those businesses that used traditional lenders, these lenders are often providing payment deferrals and debt relief options.

The SBA is also currently offering several relief options for businesses, non-profits, and faith-based organizations in order to recover from the impacts of COVID-19.

The SBA is providing funding options including:

  • Paycheck Protection Program (PPP) loans, including:
    • First Draw PPP loans; and
    • Second Draw PPP loans;
  • COVID-19 Economic Injury Disaster Loan (EIDL);
  • SBA debt relief for existing borrowers;
  • Shuttered Venue Operators Grant (SVOG); and
  • Restaurant Revitalization Fund.

There may be other options available during this time. It is important to seek the help of an attorney to determine what options are available for an individual’s small business and to have assistance applying for these programs.

Do I Need a Small Business Attorney?

Yes, it is essential to have the assistance of an experienced small business attorney for any small business issues you may have. A lawyer can play a crucial role in the lending process. 

Your attorney can assist in negotiating with lenders, preparation of documents, and assist with obtaining government loans or assistance. Having a lawyer involved in your business from the beginning gives it a much greater chance to succeed.

Save Time and Money - Speak With a Lawyer Right Away

  • Buy one 30-minute consultation call or subscribe for unlimited calls
  • Subscription includes access to unlimited consultation calls at a reduced price
  • Receive quick expert feedback or review your DIY legal documents
  • Have peace of mind without a long wait or industry standard retainer
  • Get the right guidance - Schedule a call with a lawyer today!

16 people have successfully posted their cases

Find a Lawyer