Understanding the basic types of capital is the first step in knowing where to look for startup or expansion money. The most common sources of commercial loans are banks, savings and loans, private investors, and federal, state, and local government agencies. These sources use varying methods to lend money and require different degrees of participation in your business. Loans basically come in three types:
1. Short-term loans. Also called lines of credit, these are for periods of less than one year. They’re usually used to meet short-term financial obligations. Lenders expect short-term loans to be repaid after their purposes have been served. For example, an accounts receivable loan is repaid in full when the borrower’s customers pay their outstanding accounts.
2. Long-term loans. These loans are for periods in excess of one year. The loan is repaid in set monthly amounts for a specific number of years. Most often, long-term loans require collateral or pledged assets.
3. Equity capital. This is generally associated with investors who think that your business has the potential to grow and be profitable. The loan is repaid by sharing business profits with investors and frequently gives investors an equity position in your business.
Along with traditional sources of capital mentioned above, don’t overlook other creative ways of finding money for your business. You might want to consider personal savings or equity in your home, friends and family, venture capital groups, and federal and state small-business programs.
Gene Fairbrother ShopTalk 800® Business Consultant National Association for the Self-Employed Dallas