The Value of Equity in Small Business Financing

A Home Business Article Contributed by G. Uma Bennett

The Value of Equity in Small Business Financing

Especially when you seek small business financing from your family, equity is a viable incentive. By giving you money, in exchange for equity, your relatives can become part owners of your endeavor. Make sure you keep at least 51 percent of the company to retain control and remember as shareholders, they have the right to offer suggestions on how to run the company. If this does factor does not appeal to you, another option is to offer a convertible loan. If things go well, the loan becomes equity and they become part owners of your business.

Avoid a Family Feud over Small Business Financing

If your family agrees to loan you money for your small business financing, treat it with the same respect and caution as if the money was being loaned to you by a commercial lender. Hire an attorney to draw up a contract that specifies the interest rate, payment schedule, and what recourse the lending relative has if you fail to pay the loan. Resist taking the easy route of writing the contract yourself to avoid having the document being contested at a later date and that might not protect you from every possible contingency.

Assessing the Risk in Small Business Financing from Your Family

Seeking small business financing from your family can put you in some unique situations. You may think you know your family well, but money has a way of changing the character of people. The risk with family money is there whether you succeed or fail. When you face these people as a success will there be jealousy? Or will you ever hear the end of a failed business attempt? On the other hand the benefits are that your relatives will most likely offer more emotional support than a commercial lender as well as being willing to wait longer for you to repay them.

Qualifying for Small Business Financing Micro Loan

When you start investigating options in small business financing, find out where you can apply for the SBA's Micro Loan program, that offer loans from few hundred dollars to a maximum of $35, 000, with the average loan about $10, 300. There are 700 nonprofit micro-enterprise development organizations, or micro lenders that offer two types of micro loans: peer lending and individual loans with repayment terms from six months to a year.

The first type, peer lending, involves a group of entrepreneurs who guarantee the group's loans. When the group pays its loans on time, it can qualify for larger subsequent loans.

How Small Business Financing Micro Loans Work

Once your small business financing micro loan is approved, the process is pretty straightforward. With individual loans, the money goes directly to one small business, timely loan repayment may qualify for increased loans. Personal tax returns, business tax returns if available, are required for the application process. The interest rate varies from one percent over prime to as high as 12 percent. The average peer group loan is $1, 081; the average individual loan is $10, 631.

Along with the financing comes the expertise of a professional who can help you develop your sales strategy and give you marketing pointers.