06-03 Small business capital and credit

The small business owner submits an extensive application plus: a) past tax returns; b) personal and company financial statements; and c) company banking contacts; the bank responds within days or weeks; approval rates can be low and the loan may charge an upfront “origination” fee. (Lowest Cost Debt)

• Secured Bank Loan / Secured Line of Credit (LOC)

• Unsecured Line of Credit / Credit Card

• Online Credit

The owner submits a short application without supporting documents; fast credit card company response with high approval rates; annual card fees. (High Cost Debt)

• Secured Bank Loan (also called: Secured Line of Credit)

• Unsecured Line of Credit (or Credit Card)

• Online Credit

The owner completes a short online application without supporting documentation; decisions are almost immediate with high approval rates; owners can access the cash in convenient ways and only when they need the funds but interest rates are very high. (High Cost Debt)

• Secured Bank Loan (also called: Secured Line of Credit)

• Unsecured Line of Credit (or Credit Card)

• Online Credit

The hard work a small business owner puts into forming, founding and operating his/her business – small business owners typically work very long hours. Sweat equity is as important as any capital but it’s not a cash investment.

• Sweat Equity

• Investor Equity

• Angel Investors or Crowdfunding

Investors provide capital for a small business because they expect a return - future cash dividends, sometimes discounts on what the business provides and then their share of the proceeds if / when the company gets purchased. (High Cost Equity)

• Sweat Equity

• Investor Equity

• Angel Investors or Crowdfunding

Small investments by lots of different individuals who want to see the small business owner succeed.

Angel Investors are typically “friends and family,” individuals who know the business owner and want the owner to succeed. Angel Investors typically provide small amounts of equity with no expectation of a large return.

Crowdfunding is an Internet phenomenon, where strangers learn about your business online and then decide whether or not to make an investment. Crowdfunding investors are typically “fans” of the owner, but they do expect a return on investment. (The company pays a percentage of the capital raised to the online Crowdfunding website.)

(Low Cost Equity)

• Sweat Equity

• Investor Equity

• Angel Investors or Crowdfunding