Business Finance

Learn about business financing options.

Getting Financing for Your Business

Obtaining financing for your small business, whether from private or public sources, is within reach--even in this tough economy. Learn the ins and outs of determining the money you need, the best lender for your business and how to ensure a smooth approval process.
"Money is always there, but the pockets change." — Gertrude Stein

Securing funding for your business involves numerous financial and nonfinancial considerations. But at the end of the day, you'll need more than just cash: You'll need smart money.

Money will keep your coffers filled, payroll paid and lights on. But smart money—financing where the financier provides not only capital but also support and expertise to your business—can help you:

  • Streamline your business operations,
  • Cut costs without sacrificing quality
  • Expand your business.

Of course, you can't start reaping the benefits of smart money until you obtain it.

Finding Smart Money

Unfortunately, locating smart money requires shoveling your fair share of snow before you reach the cabin. The capital market for small businesses is, like everything, imperfect, consisting of many underpublicized and poorly organized financing sources. 

Whether you are trying to locate a bank willing to lend your small business money or find an angel investor who will contribute needed equity capital, your quest for financing will require devoting the same time and resources you spend keeping your business running.

To be clear: it's not impossible. In fact, with some elbow grease and the financing knowledge you'll acquire within this article, it's well within reach. Entrepreneurs just like you tap into smart money sources every day.

Discovering the Many Types of Smart Money

Understanding the various smart money financing sources available to you requires identifying relevant traits about your business's financing profile. 

Your business' financing profile reveals: 

  • How your position in the business life cycle influences your financing options,
  • How you can estimate the amount of money you need
  • How you can find money in your own backyard by tapping friends, family and personal assets.

Yes, family and friends have helped many successful business across America. Smart money comes in a variety of forms, including:

  • Something as "professional" as an SBA-guaranteed loan that allows you to keep your ownership interests intact until your business reaches the stage at which you may want to sell shares of the business.
  • Something as familial as letting your business-savvy brother become a partner in your business because you need his $10,000 before the end of the week.

Bear in mind if your brother is truly business savvy, it'll take a lot more than some shared DNA and a firm handshake to convince him your business is worth the risk. No matter what your smart money source, you'll need to assess your business financing profile before you make your case.

Six Key Considerations for Assessing Your Business's Financing Profile

Before you can take advantage of financing and smart money options, you must realistically evaluate the investment profile and creditworthiness of your enterprise. 

We've identified the six most common financing profile points to help you assess your own financing profile:

  1. The stage of your business's development in the financial life cycle of that type of business (e.g., startup, developing or mature).
  2. The appeal of your business and its operators in the eyes of investors.
  3. The amount of capital needed for your business.
  4. Whether personal financing can cover most of your needs.
  5. Whether insider financing can fill the gap between what you have and what you need.
  6. Whether bootstrapping can reduce your need for additional funds.

We also discuss financing options for a business.

Think Ahead

Most financiers will request certain financial statements and a business plan as you present your financing profile. In order to be prepared for this scrutiny of your business, assess the creditworthiness and investor appeal of your business before you develop a business plan. While the plan should reflect your personal business goals, draft the plan so that it sells your ideas to people who are in the business of making money.

How Maturity of the Business Affects Financing Options

The amount and type of financing your business needs have one very important factor in common: the stage of your financial life cycle.

Not all small businesses are created equal, but, more often than not, they can be classified into four common groupings that share similar financing needs. 

  • Startup businesses typically face the greatest obstacles to obtaining financing because they lack a performance record and a credit history. 
  • Acquired businesses often have to jump through fewer financing hurdles than startups. Seller financing may often be another financing option to explore.
  • Growing businesses can generally parlay their established creditworthiness and operating success into more financing options.
  • Aging businesses usually have cash to spare because new investment is not a priority. These owners are where many entrepreneurs envision themselves: searching for the best way to sell out.

To better understand the vagaries of each of these four common scenarios, we'll delve into each one in detail. 

Financing for Startup Small Businesses

Startup businesses often begin with ideas and enthusiasm. Sometimes an entrepreneur is following a passion, like a life-long musician deciding he'd love to share the gift of music by opening his own music store. Or someone with a knack for business identifies a common business need and determines what product or service can solve it. 

Either way, every entrepreneur must address the financial reality involved in deciding exactly:

  • What he or she wants to do
  • When it can be done
  • How it's going to be done

Unfortunately, new small businesses have trouble securing conventional financing because they present a tremendous risk to lenders and investors. To circumvent financing difficulties, nearly three-quarters of startup businesses rely on the owner's own resources, such as:

  • Personal savings
  • Residential mortgages 
  • Consumer loans

Family members, friends and investments by private contacts or angels provide most of the remaining seed funds for new small businesses.


Some small business advisers may advocate borrowing as much money as a financier will dole out, regardless of how much you need. The theory goes it's easier for your business to manage debt (once you have cash) than to obtain cash when it's really needed. In reality, most of your small business debt will also be your personal debt, and any default on a business debt may mean disaster to your personal finances. And the more debt you incur now, the more difficulty you'll have securing additional funding at much better terms (lower interest rates) down the road. Remember it's easy for advisers to advocate a limitless assumption of risk and debt when it's not their life savings, their houses or their families' assets on the line.

So what if you don't have enough savings or personal assets to help seed your new business--and securing funding will take time? You'll find yourself in the same shoes as millions of small business owners. Welcome to the cash crunch

What is a Cash Crunch?

When your business experiences a shortage of short-term cash compounded with cash flow hardship, you're in the cash crunch. 

The good news is that the cash crunch is one of the most common financial problem for startup businesses across the nation. Nearly every great, successful business has lived through the cash crunch. The bad news is the cash crunch can be fatal to the business.

Steps for Overcoming the Cash Crunch

When you're in the midst of a cash crunch, focusing on inventory turnover and the need for immediate revenue often becomes your first impulse. It's not an illogical one either: If more cash is what you need to overcome a cash crunch, those are the best avenues to devote your resources. Or are they?

Making a daily crisis out of inventory turnover and immediate revenue may lead to more income generation, but, more importantly, it's not:

  • Allowing you to focus on sustained growth
  • Enabling you to develop new products and services

Focusing on these areas rather than obsessing over day-to-day cash intake is a large key to long-term success. And as you plan for the long-term, investigating all sources of financing—from angels to government loan programs—will ensure your strategy and research and development isn't for naught.

You'll soon discover that most debt financing (loans) your business can secure from traditional lenders (banks) will likely carry a high cost due to the high risk assumed by the financier. Moreover, unless your business can boast a significant owner investment and marketable collateral, the availability of conventional debt financing is almost nonexistent--hence the emphasis on exploring a wide variety of financing options.


The financing pressures of a cash flow shortage have forced many small business owners to take unwise, desperate measures to salvage their business. For example, cash-strapped entrepreneurs have recently "borrowed against" payments of quarterly payroll taxes, hoping to repay delinquent amounts as soon as business improves. But business often doesn't improve, and the entrepreneur not only ends up with a failed business but also faces personal and potentially criminal tax liability for failure to submit payroll taxes.

Of course, overcoming the cash crunch may be the least of your concerns when you're purchasing an existing business. 

Financial Considerations When Purchasing an Existing Business

In many respects, the financing options available when you purchase an existing business are similar to those for a startup business. In fact, financing the acquisition of an existing business is a little easier than starting from scratch as debt and equity vehicles are typically more available to you than if you were starting a similar business from scratch. 

Because the target business has a credit history (hopefully a good one), existing assets, an established operating cycle and business goodwill, you can approach lenders and investors like you're seeking to expand your current business.

But just because conventional lenders may be more interested in your business purchase than they would be in helping you create a business doesn't necessarily mean they're your best bet for financing. Buying an existing business offers a truly unique financing option: seller financing

The Advantages of Seller Financing

Current business owners selling their small businesses usually realize that they may need to participate in the buyer's financing of the business sale, and they may be willing to negotiate a very favorable debt or equity arrangement with you. 

Much like purchasing a new car, you have a number of financing options from numerous banks available when you're in the market to buy a business, yet financing through the dealer (i.e., the seller) is often easier and more affordable. 

Some of the key advantages include:

  • Obtaining a reasonable interest rate and a less demanding credit review.
  • Using the existing business assets as the exclusive collateral for the financing. In contrast to the common practice of conventional lenders, you'll rarely have to pledge additional or personal assets as additional collateral on a seller-financed loan. Moreover, a seller's valuation of the business's assets (collateral) tends to be higher than a conventional lender's; a low valuation might appear inconsistent with the asking price for the business.
  • Engaging in personal guarantees is less likely.
  • Convincing the seller to take a portion of your collateral as a (secondary) security interest.The seller may agree to take a subordinate interest if you wish to obtain conventional financing. From the seller's perspective, the more money you can secure from other sources, the more money she receives upfront. Because a conventional lender will require a priority claim on business assets, the only way you may be able to qualify for the loan is to subordinate other creditor claims, such as the seller's claim.
  • Reducing the purchase price by the buyer's assumption of existing debts or business liabilities. Typically, the majority of your down payment or initial cash price will go toward reducing the seller's existing business debt. Rather than pay off existing the seller's creditors, you can offset the purchase price of the business by assuming the business's exiting debts, essentially transforming the creditors into financiers for the acquisition.
  • Negotiating a gradual buyout can drastically reduce upfront cash. For instance, you could purchase the target business' name and goodwill--and perhaps some tangible assets--upfront while delaying or amortizing purchase of other assets. The sell may be amenable to you leasing equipment or property with an optional or mandatory buyout at a mutually agreed upon time. The seller may be willing to accept an earnout arrangement where a portion of the purchase price is contingent upon the future success of the business.

A seller may love the idea of you assuming his business debts, but he's often also personally liable on his debts. If the seller:

  • Signed the contracts in his own name
  • Committed to personal guarantees
  • Operated in a business form that created personal liability (e.g., sole proprietorship or partnership),

The seller cannot escape these liabilities by selling the business. He remains personally responsible for the preexisting debts. 

Unless the creditors agreed to a subordination contract—in which the creditor agrees to substitute the new owner or entity for the former owner—the seller cannot allow a buyer's assumption of debt to reduce the business's purchase price.

Seller financing isn't of much important if you're running a growing or mature business. But it's a financing method you'll want to keep in mind, especially as your business flourishes and you're the one looking to sell your aging business. 

Financing Options for Growing, Mature, and Aging Businesses

With some hard work, tenacity, and smart finance decisions, your scrappy startup or purchased business can become a growing, mature or aging business--the entrepreneur's dream.

Reaching any of these stages doesn't necessarily guarantee life on Easy Street, but it often means: 

  • Sufficient stability in operations, resulting in few cash flow problems
  • Ample internally generated funds from sales and investments to fund many business needs

And most importantly:

  • More financing options available thanks to your business' operating history, established value, credit history and availability of inventory and accounts receivable financing

While securing financing for any business venture is never a walk in the park, mature and growing businesses have many more options to choose from.

Growing and Mature Businesses

As the owner of a growing or mature business, when you tell financiers you're planning to expand, they're much more ready to listen.

In addition to the appealing benefits listed above, you also have the advantages of:

  • Established customers and suppliers,
  • Efficient internal operating procedures, 
  • More sophisticated marketing and advertising, 
  • Realistic long-term business plans 
  • The company's emerging (or evident) goodwill. 

All of these coalesce to improve the creditworthiness and investor appeal of the business, making debt financing and equity financing more attainable.

Debt Financing Considerations

You'll find debt financing becomes easier to locate as your business' track record supports creditworthiness. If your business has been profitable, debt financing is generally the preferred form of raising new capital for your existing business--or businesses.

Certain growing businesses, however, may be stifled by inadequate capital for expansion that stems from the reluctance to dilute ownership through equity financing

Equity Financing Options

When considering equity financing, sometimes the decision simply comes down to two points:

  • Whether you want a profitable, growing business in which you share control and can cash out your interest at a given time,
  • Whether you own a business that fails because you could not raise sufficient capital for the business to grow.

While those options may seem like a blunt false dichotomy, growing businesses can consider raising equity capital through:

  • Private transfers of ownership interests,
  • Using venture capital firms
  • Selling ownership interests through formal limited private offerings or an 

Financial Traps to Avoid

While debt or equity financing may be more readily available for your prosperous growing or aging business, it may not be the panacea for current business woes.

Simply put, money is never the answer to overextending your business or poor decision-making. More specifically, more money won't help if you: 

  • Rush expansion or acquisitions,
  • Purchase too many expensive fixed assets or 
  • Form unwise associations with other businesses.

To avoid these traps, realize your limitations. Seasoned entrepreneurs engage professionals to assist in legal and business matters when they know they're in over their head. Remember that you're the visionary for your business. Employing experienced management to handle the growing complexities of the daily operations can be another investment in ensuring your business' success.

Aging Businesses

The vast majority of entrepreneurs never own an aging business because:

  • They fail at an earlier stage or 

  • They remain healthy, growing entities.

An aging business is characterized by a conservative philosophy aimed at maintaining the business's internal bureaucracy and its market status quo.

While most entrepreneurs are known for their desire to keep growing, some small business owners reach the point where their innovation and creativity are limited to tinkering with current products and existing markets. Investment into new product lines and emerging markets represents a financial risk that owners unwilling to assume. Aging businesses tend to be cash-rich because less investment is being undertaken.

At a certain point, these entrepreneurs are ready to trade in their pricing models and PowerPoint presentations for palm trees and pina coladas. To transition from business owner to beach bum, you'll need to know the financial aspects of selling your business and retirement planning.

Appeal: Nothing Sells Like Success

Every small business owner is convinced that the enterprise will be successful and that investors can be persuaded by these convictions. And for very good reason: When you strike it on your own, you have to believe in yourself, especially when non one else is. 

And after you've proved it with years of success, respect among your business peers and an aging business, you will find it all come full circle as you, once again, need financing to sell your business. And, once again, you'll need to provide objective evidence that your business will succeed.

Every potential lender or investor will look at how the injection of their cash will:

  • Be used in the day-to-day operations and expansion of the business,
  • Will either be repaid and or result in a profitable return

Many of these questions may be answered by data contained in your business's financial statements and projections; however, lenders and investors also make more subjective evaluations of you and your company. These assessments may affect your financing requests even more than the objective numbers.

Additional evidence of future success for your business can sometimes take the form of:

  • Contract commitments from existing or prospective customers,
  • Industry or professional opinions
  • Market research — even if it's informal testimonials. 

In your business plan or loan application, make sure to note any:

  • Advantageous market trends 
  • Consumer appeal 
  • Management experience 
  • Retention of skilled employees and
  • Availability of any special resources, such as a valuable patent

Identifying a lender whose strategic approach or special industry focus matches your business will also enhance the subjective appeal of your business.

Making the Case for Selling Your Business

Convincing someone to invest in your business when you're selling it vs. when you're ramping up involves one major difference: you. You're no longer at the helm to ensure continued success of your enterprise, so your tactics for seeking funding for selling your business must adapt to this reality.

When you make your case that your business is a worthy investment, keep in mind that most lenders and investors are followers, not leaders like you. The best evidence of a good investment will be your prior success in raising capital and how the business is designed to succeed without your continued presence. 

A financier wants to spread risk as much as possible, and a certain comfort level may be reached if other investors have a significant vested economic interest in your business. If you can show a strong financial commitment to the business from additional investors, as well as a meaningful personal investment by the business owners, the appeal of your company will correspondingly increase. Your past business experiences, your expertise, and your managerial skills likewise play a crucial factor in determining the appeal of your business.


As a general  rule of thumb, most lenders will expect owners to have an equity investment of at least 25 percent of the total cost of the business.

If you can establish a personal relationship with a particular financier, such as a local community banker, your past successes and business experience are more likely to be considered in determining the likely future success of your business without you. Use your personal resume, as well as letters of reference from community professionals and business persons, to help project yourself as a reputable, reliable, and creative business person who's turning over a solid business with great potential.

And now that you have getting financing down pat, no matter what stage of the business life cycle your company is in, you can delve into what every small business owner must know: estimating the money you need to succeed. 

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