Funding for small businesses is often determined by the type of business organization. A sole proprietorship will allow you to use your person credit. A limited corporation will allow you to shield your person assets, but also reduces what you will be able to borrow. A partnership may allow you to leverage more than one person's credit, but it can also put that person at greater risk.
When we talk about funding for small businesses we usually are talking about starting with personal savings, credit, often credit cards and loans. Credit is a huge issue. I have a friend who runs a string of gyms for women. When she started she had her car towed. She wasn't in the handicap parking, she had missed her payments. She started her business with saving and ran it on cash flow. One good line of credit would have really helped her. As a sole proprietor her credit was limited. A partnership would have helped her gain more credit, although of course choosing the right partner would also have helped. Once she got the business up and running, cash flow took over and the same bank that towed her car was offering her money, but getting enough equipment to attracted customers was problem, a big problem.
Another friend started a limited corporation planning on taking it public. This was a bio med company. His business went through many of the options of funding for small businesses. They started as a limited partnership and worked on getting a few cell lines going. His partner was a researcher and got a grant. A clever trick that made common bacteria look like anthrax allowed them to take advantage of a huge demand from bio companies making test for pathogens right after the anthrax attacks in the US. I mean do you want a vial of Deadly anthrax on your mad scientist desk of a vial of E. coli with a modified surface that looks like anthrax to antibodies?
With that cash flow they attracted investment groups; corporate credit can be great. After that there was the IPO. Now they could fund with two options; debt or issue stock. If they grow even bigger they could issue bonds. The last time I talked to him, he was looking for the door. He likes to build companies, not run them. This is another consideration with funding for small businesses; your exit strategy. If you put your house at risk to start a business, what return would you expect? Often this is where a person fails in business.
I have a brother in law who was looking to cash out his business after twenty five years of building it up. A group of investors offered him a million dollar buy out. He would remain for a year and help them take over operations. The million dollars was based on an equity deal with the primary partners. After three years the partners had left, he was still running the business, but the brand was tarnished and the talented staff outsourced to India. With cash flow down and the stock tumbling, his million was at a tenth the value he'd thought it would be. He mortgaged his house for five years to stabilize things while he took control again and rebuilt. His partners? The sold high and left; a brutal lesson in funding for small businesses.
My wife and I ran a preschool out of our home. No fancy limited partnership or incorporation. She learned a lot about child development and was wildly successful. We only advertized the first year. After that word of mouth sold the slots. Unfortunately, you can't scale up a business like this. We would need a dedicated space for more children and would need to hire an assistant for more than eight. That would require all kinds of things; background checks, time and labor rules, emergency planning. Our exit strategy was a big yard sale, not a franchised business. Funding was easy, we spent some savings money, and used the cash flow from the monthly billing to cover things as we bought them.
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