Debt Financing
Debt financing requires that you qualify for a traditional bank loan (not common for raw startups), or that you find a bank that can provide you a loan with a SBA guaranty.
Before you land a loan, you need to understand how to maximize your odds for success in landing a loan. The lending process is inherently a tough one, but it's also a system that has been the catalyst of success for many small businesses. In fact, some entrepreneurs would say that their relationship with their banker has been the pivotal ingredient to growth.
Upside
- You don’t have to give up equity, proceeds or control in order to get funded.
- You build a powerful relationship with your banker that can open up additional forms of debt financing you may need down the road.
Downside
- Bank loans typically go to existing small businesses with 2 years of history and credit.
- You must pay interest, and if you don’t keep up with your loan payments, you could find yourself in a tough spot with the bank.
- You may be required to provide personal collateral, such as your home, to obtain the loan.
Grants
Grants are special programs designed to fuel the innovative fires of small businesses, and typically target specific groups or types of businesses, such as technology businesses, veteran-owned businesses, women-owned businesses and minority-owned businesses.
Upside
- You don’t pay interest – grants are essentially “free money.”
- Potential investors (should you be seeking additional funding) love the “leverage” that grants provide.
Downside
- The competition is stiff for grants, and grant writing (applying for the grants) is an art form, so you may want to find a grant writer to help you.
- How you can use grant funds is strictly defined by the organization that provides them.