Small business financing

Small business financing

Small Business Financing

Small business owners have a wealth of financing options available to them, ranging from personal capitalization of the business to a variety of third party small business financing options, whether by way of loans or sale of securities. This article will review some of these forms of financing, and offer some insights that small business owners should consider in selecting how to finance their business.

Personal Financing

The simplest form of financing is where the business owner uses his or her own capital. This is done by making a capital contribution to the business in exchange for an ownership position, or, alternatively, by making a loan to the business. Many business owners use a combination of the two.

When using both forms of capitalization, a key issue is determining how much money to contribute as capital, and how much money to loan to the business. An adequate amount must be contributed as capital so that the business is not considered to be “thinly capitalized,” which is the situation where a business has a disproportionately high amount of debt versus equity.

To determine whether a business is adequately capitalized, capital structures of other businesses in the same industry and their typical debt-to-equity ratios should be considered. Another general rule is that the IRS considers a business to be thinly capitalized if its debt to equity ratio is greater than 3 to 1 (or some may say 4 to 1).

Business owners should keep these guidelines in mind when capitalizing their business, and should be careful not to lend the business disproportionately large amounts of money. There is, of course, a temptation to do so, because interest on the loans is deductible.

Third Party Small Business Financing

1) Banks

Banks are the principal source of third party financing for businesses, and they have customarily played the role of supplying short term, working capital. They also do engage in long term lending, along with inventory financing, equipment leasing, accounts receivable financing and offering other specialized types of credit.

A business’s first line of credit from a bank will likely have to be secured and will be have to be guaranteed by the business’s owners.

2) Small Business Administration

The U.S. Small Business Administration (“SBA”) offers small businesses a variety of lending options, the details of which can be read about here.

The SBA doesn’t lend money directly to small businesses, but it does serve as a guarantor of commercial loans to small businesses, as well as offering guarantees on surety bonds and partnering with qualified private investment funds to provide additional capital to qualified small business concerns.

3) Oregon Resources 

There are also specific resources particularly for Oregon business. These include the Oregon Business Development Fund; the Oregon Capital Access Program; the Entrepreneurial Development Loan Fund; the Oregon Trade Promotion Program; along with various other resources. More information about these can be found here.

4) Portland Resources

The following are resources based out of Portland, and which serve businesses in this area. A few examples include the following:

Portland Seed Fund
Portland Incubator Experiment
Avita (focusing on women, minorities and persons with disabilities)

Additional local resources can be found through the Business Portland web site.

5) Web Based Resources

A resource that did not exist up until recently is web based lending companies and crowd funding platforms. These offer many of the same features that used to be offered only by brick and mortar banks. Some examples of these companies include the following:

Somolend (startups and small businesses can obtain loans from local investors and institutions)
Fundersclub (accredited investors pool their monies to invest in startups) 
Angellist (through their web site startup companies can network with angel investors)

Another new and interesting company that I recently learned of is kabbage, which markets itself as a company that offers “the world’s fastest platform to provide small business financing.”

This list is by no means exhaustive, but is a good starting point for area businesses considering different methods for financing their business. The list of web based resources, in particular, is quite short, considering the number of such resources that are quickly springing up, especially after the Jobs Act legislation that approved crowd funding.

In situations where financing includes the offer or sale of securities, securities laws must absolutely be considered as part of the analysis of that financing.

If you need legal assistance in connection with small business financing, or any other form of financing of your business — especially if your business is in or around Portland, Oregon — please contact us.

Author: Andrew Harris

Andrew Harris is an attorney in Portland, Oregon and he wrote this article about small business financing.

Learn More

To continue reading more about the laws that might affect your business, please see the Articles page, or to simply see a list of helpful legal resources for Oregon startups and businesses, please see the Legal Resources page.

If you need assistance with a particular legal issue affecting your business — especially if your business is in or around Portland, Oregon — please contact us and we will get back to you as quickly as possible.