The Funding Landscape For Small Businesses Part 1
As job markets in developed countries continue their ponderous march towards recovery, one area of the economy still lags. Banks have only recently begun to lend to small business. Both individuals and small businesses have faced tightening of credit standards enforced by risk-averse banks impacted by capital adequacy legislation in the wake of the financial crisis. Mortgages have been hard to secure, and the level of support for small business has been even tighter. From 2008 to 2011, loans to small businesses in the US fell by 23.5 percent. The net effect has been to inhibit an already muted recovery.
These trends haven’t been confined to the United States. Lending has been even tighter in Europe, particularly in stressed markets such as Ireland, Spain and Portugal and small business conditions in the UK have been equally unyielding. While there are some signs of a thaw, the days of easy credit propelling entrepreneurs to create new and innovative companies are clearly in the past. The need for a clear business plan has never been more important.
In this article we discuss the various forms of finance, the criteria that must be satisfied, and why you should plan the capital requirements for your small business. Before we get onto that let’s take a look at the difference between debt and equity finance.
Business Plan – Funding Structure?
Most small businesses will capitalize their venture through either debt or equity. Debt finance is money borrowed, usually from a bank or other commercial lending institution, at a market rate of interest. Equity is money invested in the business in return for an ownership stake. It is critical to understand the type of capital you are seeking and also the cost attached to the capital. Debt funding acquired from a bank is loaned at a rate of interest, which depending on the size of the loan will be a material cost to the business in terms of interest paid.