Learning Objectives
At the end of this module, you will be able to:
Identify the types of financing available.
Identify the difference between debt and equity financing.
Consider important factors when determining which financing program is right for you.
About FDIC Supplier Diversity Effort
The Federal Deposit Insurance Corporation (FDIC) recognizes the important contributions made by
small, veteran, and minority and women-owned businesses to our economy. For that reason, we strive
to provide small businesses with opportunities to contract with the FDIC. In furtherance of this goal, the
FDIC has initiated the FDIC Small Business Resource Effort to assist the small vendors that provide
products, services, and solutions to the FDIC.
The objective of the Small Business Resource Effort is to provide information and the tools small vendors
need to become better positioned to compete for contracts and subcontracts at the FDIC.
To achieve
this objective, the Small Business Resource Effort references outside resources critical for qualified
vendors, leverages technology to provide education according to perceived needs, and offers
connectivity through resourcing, accessibility, counseling, coaching, and guidance where applicable.
This product was developed by the FDIC Office of Minority and Women Inclusion (OMWI). OMWI has
responsibility for oversight of the Small Business Resource Effort.
Executive Summary
A successful business needs a committed owner, a strong business concept and strategy, and financing
to help the business grow and thrive. Using your own money to start and finance a business is the
easiest approach, but may not be an option. Instead, you may need to obtain financing or capital from
friends and family, a bank, or other sources. Regardless of the source, financing can be categorized into
two options: debt and equity financing.
This module explains the rules and requirements of financing
options to help save you time as you begin applying for funding.
Determining Your Financing Needs
You’ve decided to turn your passion into reality by opening a small business. Now what? One of the first
steps is determining how much money you will need to start this business regardless of the source.
Some businesses can be started with minimal upfront capital, while others require a large initial
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Fueling Your Business: A Guide to Financing Your Small Business
investment to purchase inventory or equipment. You will also need money to maintain your household,
and you should keep that separate from any money you use for starting your business.
To decide how
much you need:
Determine Your Start-Up Costs: When determining your start-up costs, think about:
One-time charges: Include one-time items like building signage, business name registration,
incorporation fees.
Recurring costs: Include fixed costs (rent, utilities, insurance, payroll) and variable costs
(inventory, shipping, sales commissions).
Hidden costs: As a start-up, you’ll find hidden costs you didn’t include in your plan. You
should have at least 10% in contingency money for these costs.
Determine Your Personal Equity: One of the first questions any financial institution will ask is
how much personal equity you will bring to the table. The amount of personal equity most
lending institutions require is 20% to 40% of the total loan request.
Estimate Your Monthly Expenses: It’s important to estimate your expenses as closely as
possible through month-to-month cash flow projections. Asking for more money than you
actually need may jeopardize your ability to secure a loan and will make your loan payment
higher.
If your business is already established and you want to expand, you will need to be able to show your
business is profitable to be eligible for financing. If you are applying for funds due to financial difficulties,
you will most likely need collateral to secure any type of loan.
Types of Financing
You have several options when considering financing:
Your Own Assets: Starting or growing a business with your own money puts you in the best
financial position. Using your own money keeps you from taking on additional debt, and you
don’t give up equity in the business. You also don’t have to repay anything and no interest will
accrue. If you use jointly-owned accounts, make sure you have the other owner’s consent.
Sales/Income: If you already own a business or have clients lined up before you open your
business, the best way to grow your business is to use customer sales revenue. You get the
same benefits of using your personal funds without depleting your savings account. You don’t
take on additional debt or give up equity, and you won’t have to pay back a loan or accrue
interest. Your growth may be slower, but you will have greater peace of mind without a loan
repayment schedule.
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Credit Cards: Financial experts warn against using credit cards because of high interest rates and
the risk of damaging your personal credit. In some instances, using a credit card might be an
easier solution than getting a traditional loan. An example would be using a credit card to cover
short-term cash flow problems when you are guaranteed income soon. If you use a credit card,
only do so if you can pay it off each month. If you can’t pay off the credit card monthly, you will
incur even more charges in interest and late fees. If your payments are late, you may also incur
even higher interest rates.
Friends and Family: Borrowing money from friends or family may seem like a good idea initially,
but you need to weigh the odds. Ultimately, the question becomes, “At what expense am I
receiving this money?” If the money is given as a gift, it does not need to be repaid. But if the
money is given to buy interest/ownership, then you need to determine how that arrangement
will work. Will they have input in the decision-making process? Or, will they be board members?
Regardless of their role, you should be cautious. In any situation, make sure you have loan or
investment papers drawn up with clearly defined investment, ownership, and repayment terms.
Crowdfunding (also called crowd financing, equity crowd funding, crowd-sourced fundraising): A
collective effort of individuals who network and pool their money, usually via the Internet, to
support efforts initiated by other people or organizations. Crowdfunding can also refer to the
funding of a company by selling small amounts of equity to many investors. This form of
crowdfunding has gained attention from lawmakers and should be thoroughly researched to
ensure compliance with securities laws. Crowdfunding has its origins in the concept of
“crowdsourcing,” which is the broader concept of an individual reaching a goal by receiving and
leveraging small contributions from many parties. Crowdfunding is the application of this
concept to the collection of funds through small contributions from many parties in order to
finance a particular project or venture. Crowdfunding models involve a variety of participants,
including the people or organizations that propose the ideas/projects to be funded, and the
“crowd” of people who support the proposals. Crowdfunding is then supported by an
organization or “platform” that brings together the project initiator and the “crowd.” Platforms
are being developed regularly and include web sites such as “Kickstarter,” “gofundme,”
“Seedrs,” “SellaBand,” or “CrowdCube.”
Banks: If you have had an existing business for one or two years, you have a better chance of
receiving a loan from a bank. If you are starting a business, banks typically require a guaranty
and personal collateral for business loans. The Small Business Administration (SBA) provides
loan guarantees to banks to encourage them to make small business loans. If you default on the
loan, the SBA will repay the bank. However, the business owner is still responsible for
repayment of the full loan. As an existing business, you should establish a line of credit with a
bank as your business grows to help manage your cash flow.
Angel Investors: Angel investors are typically wealthy individuals who want to invest in up-andcoming businesses. They are similar to venture capitalist firms but are usually individuals. If you
use angel investors, know that they will expect to see some return in the form of stock or stock-
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buyback when the business purchases outstanding stock within seven years. Business owners
looking for angel investors should network with lawyers or accountants who work with small
businesses; they may have investors to whom they can refer you.
Peer-to-Peer Lending: Businesses use this method of lending (also called online lending or
person-to-person lending) because it’s cheaper and easier than getting a loan through banks.
These loans are considered individual loans or personal debt and will show up on your personal
credit report, lowering your credit score. You need a good personal credit score to qualify for a
peer-to-peer loan, usually 640 or more, and loans are usually capped around $25,000.
Unsecured Business Loans: This type of loan does not require collateral and is also called a line
of credit loan. These loans are riskier for lenders due to no collateral as a repayment guarantee.
Due to this risk, the loan amounts are smaller, and the interest rates are higher.
Small Business Loans: These types of loans are for businesses with relatively few assets which
generate modest annual revenue. You must be qualified as a small business to be eligible for
small business loans. Small businesses are generally measured by various factors such as
amount, value and type of assets owned, revenue and income generated, number of
employees, and years in operation. Most lending institutions require a guarantee and collateral
for small business loans. The SBA does not lend money, but does offer guarantees for small
businesses that qualify for loans through commercial banks, finance companies, and
government entities.
Minority Business Loans: Businesses eligible for minority loans must be owned exclusively or
predominantly by individuals of a minority background. These loans are not just for small
businesses, and the applicant must comply with the requirements of the lender. Requirements
may be based on minority ownership or being located in a predominantly minority occupied
neighborhood.
Certain non-profit entities that advance and support certain minority groups may
have small business loan programs available.
Federal Grants for Small Business: Small business loans and small business grants may be
awarded to businesses that meet the size standards that the SBA has established for most
industries in the economy. The most common size and revenue standards are as follows:
500 employees for most manufacturing and mining industries.
100 employees for all wholesale trade industries.
$6 million for most retail and service industries.
$28.5 million for most general and heavy construction industries.
$12 million for all special trade contractors.
$0.75 million for most agricultural industries.
With some exceptions, all federal agencies, and many state and local governments, use the size
and revenue standards established by the SBA. You can search for further information and for
loan opportunities by visiting the Small Business Administration (sba.gov).
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State Grants: When searching for small business grants, start by looking at the state where your
business is located. Many states have agencies designed to offer grants and other types of
business assistance in order to encourage small business growth and development in their area.
Most states have a Small Business Development Center (SBDC). SBDC's are a nationwide
network of sites, typically housed at colleges and universities, which provide training and advice
to small businesses on all aspects of starting, financing, and managing a business.
You can also
visit the Association of Small Business Development Centers (ASBDC) (asbdc-us.org/) and search
by your zip code.
Vendor Finance: If you have established a good relationship with a vendor, the vendor may be
willing to finance part of your business by extending their terms of payment for a
predetermined length of time. You can approach vendors and show them your business plan
and the orders you’ve already received. If the vendor is convinced that your business will be
successful, and one of their better customers in the future, they may be willing to offer
extended payment terms. Establishing supplier exclusivity for a documented amount of time
may also be exchanged for longer credit terms. Your business may be required to pay a higher
price for this arrangement.
Prepay Financing: If you have successfully demonstrated to your customers that you deliver
your merchandise on time and as ordered, you may be able to persuade one or more of them to
put a deposit on their future orders, perhaps as much as 50%. You can add an incentive by
slightly decreasing your price in exchange for the deposit. Or, you can offer a bonus: if they've
ordered 100 items, they get 10 at no charge. New customers can also be asked for a deposit,
especially if it's a large or custom order.
