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Financing Tax Info Sheet
Private Sources
The easiest to obtain and usually the lowest cost
Personal Resources Loans or equity contributions from the owner's personal resources. Advantage: obtain more quickly than other sources.

Disadvantage: lose availability of funds for future personal emergencies.

Friends or
Relatives		 May take the form of debt, equity or a hybrid debt with an option to convert equity. Advantage: often available at a lower cost of capital due to the relationship between the parties.

Disadvantages: may result in inadequate financing or financing at terms that inhibit the ability of the business to operate or grow; may lead to later friction between the parties.
Friends or
Relatives		 May take the form of debt, equity or a hybrid debt with an option to convert equity. Advantage: often available at a lower cost of capital due to the relationship between the parties.

Disadvantages: may result in inadequate financing or financing at terms that inhibit the ability of the business to operate or grow; may lead to later friction between the parties.

Short-Term Financing
Demand notes and funds due in one year or less
Vendor Credit Vendors tend to relax their credit constraints as the company begins operation.
Customer
Deposits		 Customer prepayment funds the working capital needed to manufacture or provide the product or service the customer will ultimately receive.
Maintenance
Contracts		 Contract with a customer in which the company guarantees service for a specified period in return for a set fee paid in advance. Advantage: advance payment is not recognized as income until the service is performed, but business has the money in the bank to fund operations. Disadvantage: business is committed to providing maintenance and repair services that may cost more than the revenue generated from any one contract.
Lines of Credit Agreement with a bank to borrow up to a specified amount whenever needed, with interest paid only on amount actually borrowed. To obtain a line of credit, business ordinarily must pledge certain assets as collateral, generally including accounts receivable, inventory and any other short-term assets.
Demand Notes Note has no fixed term; is callable by lender. May be unsecured or secured by owner's personal assets.
Demand Notes Note has no fixed term; is callable by lender. May be unsecured or secured by owner's personal assets.
Accounts
Receivable
Financing		 Provides an acceleration of collections by receiving today what would have been collected in the future. May take the form of (1) advances against accounts receivable, (2) factoring or (3) credit cards.
Inventory
Financing		 Loans collateralized by specific items or total inventory. Seldom exceed 50% of inventory balance.
Construction
Loans		 Loan funds are drawn as construction of commercial property progresses, and repaid from proceeds of permanent financing (normally a long-term mortgage loan) obtained when project is completed.
Asset-Based
Lending		 Asset-based lenders will make loans to companies that are highly leveraged or lack strong cash flow, and may accept collateral that is not attractive to banks. Advantage: typically no compensating balance requirements or extensive loan covenants. Disadvantage: lender charges higher interest rates, maintains tighter controls over collateral and often values collateral very conservatively.

Medium-Term Financing
One to Ten years; may be secured or unsecured
Equipment
Financing		 Manufacturers and suppliers of machinery, equipment and vehicles often provide financing.
Leasing
Arrangements		 A popular way to obtain business equipment Advantages: conserves cash because of the small down payment, generally is less restrictive than a debt agreement and provides some protection against obsolescence because the business may return the equipment at the end of the lease term.

Disadvantage: the business does not own the asset at the end of the lease term, although the equipment can often be purchased for a nominal amount.

Term
Loans		 Loans of 1 -10 years secured by specific machinery and equipment with fixed or variable interest rates, depending on the bank. Most banks will normally advance 70% to 95% of the FMV of new machinery or equipment and 50% to 80% of the quick sale value of used machinery or equipment.
Government
Loan
Programs		 U.S. Small Business Administration (www.sba.gov), National Science Foundation (www.nsf.gov) and Departments of Energy (www.doe.gov), Housing and Urban Development (www.hud.gov), Interior (www.doi.gov), Commerce (www.commerce.gov) and Agriculture (www.usda.gov). In addition, some state and local agencies provide financing.

Long-Term Financing
Difficult to obtain except for mortgage loans
Equity
Financing		 Potential sources include private investors, other companies and early employees of the business who want to participate in its growth.

Advantages: generally cheaper than debt because there is no interest cost does not have to be repaid. Disadvantages: issuing equity to new shareholders dilutes the owner's holdings; the additional owners may insist on participating in management, which could cause conflicts.
Ventura
Capital		 Venture capitalists typically invest $500,000 or more in a company expecting that in three to five years it will be worth considerably more.
Angel
Investors		 Venture capitalists who typically invest between $25,000 and $500,000 in demand a lower return on their investment and be willing to invest for longer periods.
Mortgage
Loans		 If the business owner has significant equity in his personal residence, the proceeds cf a home equity loan can be used to fund initial start-up costs; loan terms can range up to 20 years
Layered
Financing		 Uses several financing sources at one time; should be considered if a single source fails to meet the business's needs. May be attractive to potential financing sources because it allows them to share financing risks.

However, it can be time-consuming and complex since the business is pursuing multiple financing sources with differing requirements at the same time.