Two Types of Financing Options for Women Business Owners
The two types of financing options that are available through the SBA are equity financing and debt financing. The SBA does not offer grants to for-profit small business owners.
- Equity Financing: This form of financing comes from investors. It is not money that you have to pay back, but investors will expect a high rate of return or part ownership for investing in your company.
Equity financing often comes from angel investors, the business owner’s private funds, family and friends, or stock sold to shareholders. The SBA may be able to help you find equity financing through programs that attract venture capitalists.
- Debt Financing: This type of financing involves borrowing money with a promise to repay the amount borrowed, plus interest. Debt financing can come from selling bonds, bills, or notes to lending institutions, individuals, and sometimes, to investors.
The SBA may be able to help with debt financing through its guaranteed lending program. In most cases, the business owner must personally guarantee repayment of the debt.
Equity Financing Through The Small Business Administration
If your business has a high debt-to-equity ratio, experts suggest considering increasing your owner equity before looking for equity financing. The more you have personally invested into the business the more likely you are to find equity financing.
Equity financing can come from family, friends, or other individuals, but the majority equity financing for small businesses comes from venture capitalists. Because venture capitalists are investing for profit they can often be very vocal about your business practices, strategies, and performance.
Venture capitalists tend to favor established businesses that have been in operation for at least several years and are, or have the potential to become regional or national businesses. They typically invest $250,000 or more and expect a high rate of return.
According to Creative Investment Research, an independent investment and research company, less than 4% of all venture capital is awarded to women business owners.
How the SBA Can Help with Equity Financing
The SBA licenses certain private organizations to provide equity financing to small businesses. Because these organizations only fund small businesses, they may qualify for govern-backed, long-term financing.
Organizations licensed by the SBA include:
- Small Business Investment Companies (SBICs): SBICs are financial institutions licensed by the SBA to provide equity financing and long-term credit (maturity of at least five years) to small businesses. SBICs review applications for disadvantaged individuals, but their investment and lending focus leans more towards stable businesses with growth potential.
- Specialized Small Business Investment Companies (SSBICs): These organizations typically focus on funding applicants who are socially or economically disadvantaged. SSBICs may give special consideration to women entrepreneurs.
- Minority Enterprise Small Business Investment companies (MSBIs): Businesses that are at least 51% owned, by at least one minority person, may be able to attract venture capital through MSBIs investors.
Debt Financing
If your business has a high equity-to-debt ratio the SBA recommends debt financing. Debt financing involves selling bonds, bills, or notes. Debt financing simply means going into debt (borrowing money to be paid back). Sources of debt financing include:
- Banks and savings and loan institutions
- Commercial finance companies
- Personal loans from family, friends, or other individuals
- State and local resources
- The Small Business Administration
Because banks and other lenders may be hesitant to offer long-term debt financing to small business owners, the SBA offers a guaranteed lending programs. These programs reduce financial risks to lenders making it easier for small business to obtain long-term debt financing.
The SBA’s programs may help you get a loan, but lenders will still look at owner equity (how much you have already invested in your business) and will likely require personal guarantee of repayment.
Sources:
“Programs and services to help you start, grow and succeed.” United States Small Business Administration. March 31, 2008.
“Program Description: What Is a Small Business Investment Company?” National Association of Small Business Investors. March 30, 2008.
"Creative Investment Research; MinorityFinance.” Creative Investment Research. March 30, 2008.
