Financing a new small business is one of the biggest hurdles that an aspiring entrepreneur faces. But it’s not an insurmountable one. There are sources of start-up funds that are not as difficult to secure as many people assume.

The key is to find the right type of financing for your specific needs, determine exactly how much you need and what your responsibilities are to the lenders, and know how to use those funds wisely. A wrong move in any one of these areas could make the difference between success and failure for your small business.

Sources and types of small business financing fall into a few broad categories. It will either be debt or equity financing from institutional or informal sources. Debt financing is a loan you pay back. Common sources include: family and friends, personal credit cards, home equity lines of credit, commercial bank loans and bank loans backed by the U.S. Small Business Administration.

Some small businesses also receive a type of funding from suppliers and vendors in the form of special payment terms, discounts or even direct loans. Suppliers want you to succeed because it means more business for them, so they are sometimes willing to help.

With equity financing, you offer investors shares of your business in return for cash. Unlike loans, you are not required to pay the money back, but these investors now own part of your business and will want a return on their investment. Venture capitalists work this way, and stock offerings are a type of equity financing.

Other funding or cost-sharing options include partnerships, joint ventures, alliances, co-branding arrangements and business incubators. Incubators rarely offer cash, but they provide crucial support in the form of free or reduced rent and business services.

The SBA offers several financial assistance services for small businesses, including the popular 7(a) loan program. Most U.S. banks participate in the program, which provides loans on a guaranty basis, i.e., lenders structure their own loans based on the SBA’s requirements.

For counseling and workshops:

www.score-rochester.org

For today’s topic and former articles:

www.score-rochester.org/pb_articles.html

For more information on SBA Loans:

www.sba.gov/services/financialassistance

Now let us clear up one question that SCORE counselors are asked quite often…”where can I find a grant” So I again turned to one of our counselors for the answer that he has given many times. “Despite information to the contrary”, former local Bank President, Paul Olander explains that “no federal government agency—including the Small Business Administration—offers grants to start or expand small businesses. Most foundations, corporations and private institutions that sponsor grant programs follow the same policy, except in cases where the business involves development of a new technology, or is a nonprofit organization.“

Olander comments further, as mentioned above, the SBA does administer several loan programs in partnership with local lenders, community development organizations, and micro-lending institutions (agencies that specialize in limited, short-term financing). SBA backs those loans with a guaranty against non-payment for a portion of the loan. This eliminates some of the lender’s risk. In other words, your application for an SBA-backed loan is actually an application for a commercial loan structured according to the bank’s and SBA’s requirements. It is expected that this will be repaid. The good news is that for the next several months, some of these loan programs have increased this guaranty amount.

To learn more about financing a small business, contact SCORE “Counselors to America’s Small Business.” These volunteer counselors provide free, confidential business counseling as well as training workshops to small business owners.

Dean L. Swanson is the chairman for the southeast Minnesota chapter of SCORE, an acronym for Service Corps of Retired Executives but the full name is no longer used.