Common Forms of Capital
Form of Capital /
Provider
This Financing is
Ideal For:
-All businesses
Equity
Grants
Equity
Crowdfunding
-Startups
-Exciting / innovative
business concepts
Angel / Seed
Investment
-Startups
-Businesses with high
growth potential
Venture Capital
-Early-stage
businesses (1-3 years
track record)
-High growth
businesses
-Established
businesses
-Strong credit and
collateral
-Established
businesses -Moderate
credit and collateral
-Businesses
that don’t qualify for
bank loans
Bank & Credit
Union Loans
SBA Loans
(through banks)
CDFI Loans
Pros
-Cheapest available
form of capital for
businesses (no direct
cost)
-Opportunity to raise
large amounts through
small individual
contributions
-Available to startups
-Often comes with
mentorship, advice, and
connections
-Potential for large
investments
-Often comes with
mentorship, advice, and
connections
-Cheap
-Requires giving up
ownership & control to
investors
-Investors require a
liquidity event (e.g.
future sale) to recover
their money
-Tough to qualify for
-Long process for
funding
-Hands on support
provided during and
after application
-More expensive than
bank loans
-Long process for
funding
-Very expensive
-Short term for
repayment
-Limited support /
assistance provided
-Very expensive
-Short term for
repayment
-Businesses
that don’t qualify for
bank loans
-Quick to obtain
Credit Cards /
Lines of Credit
-Businesses with
uneven cashflow
Revenue Based
Financing
-Businesses with
stable or recurring
sources of revenue
(e.g. subscriptions)
-Businesses with
invoices from large
-Quick to obtain
-Flexibility to pay back
and draw down as
needed
-Flexible repayments
based on revenue
Debt
-Applications can be
time consuming
-Programs expire very
quickly
-Often requires deep
network of friends and
family
- Requires giving up
ownership in business
-Cheap
Online Loans
Invoice
Financing
Cons
-Lenders provide loans
based on invoices
-More expensive than
bank loans
-Long process for
funding
-More expensive than
bank loans
Commercial
Mortgage
Merchant Cash
Advance
buyers (e.g.
corporates or
governments)
-Businesses with their
own property
versus personal credit
or collateral
-Businesses with a
point-of-sale account
(e.g. PayPal, Square)
-Quick to obtain
-Flexible repayments
based on revenue
-Flexible repayments
that adjusts based on
actual revenue
-Cheap
-Typically very long
term
-Requires owning
property
-Long process for
funding
-Very expensive
-Limited support /
assistance provided
5 C’s of Credit
The two most important C’s that lenders typically focus on are Capacity and Collateral.
> Capacity is your ability to repay a loan, which is assessed by lenders based on the financial
performance of your business, your credit score, and history repaying loans.
> Collateral references any assets that you or your business own which can be used to
guarantee or secure a loan.
> Capital is the amount of money that you and other owners have and will continue to invest
personally in the business.
> Conditions refers to the economic and industry environment in which your business is
operating
> Character is a lender’s subjective opinion of your general trustworthiness, creditability, and
overall character.
Beware of Predatory Lending Practices
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High cost: Small business lending products can cost in excess of 100% through high interest
rates, origination fees, and other embedded hidden fees in loan documents. When seeking
financing, it’s important to know that you have many options – and that options that offer fast
financing are often the most costly.
Lack of transparency: Predatory lenders often disclose the terms of their financing in an
unclear manner, including disclosing monthly (versus annual) rates, and embedding hidden
fees in the loan documents. When seeking a loan, make sure that your lender provides you with
the Annual Percentage Rate (or APR) which measures the all-in financing cost of a loan on an
annualized basis of the loan.
Predatory behavior: Watch out for lenders that appear to be engaging in predatory behavior
during the loan experience. This most commonly includes:
–
Pressuring you to sign loan documents and get financing quickly without
understanding the true cost
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Charging fees if you try to prepay a loan before its maturity date.
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Debt traps – extending you credit without considering any existing debt you have,
and/or trying to constantly extend you more credit
Aggressive collections practices that can lead to permanent damage to your credit
score
Predatory products: Certain products like Merchant Cash Advances (or “MCAs”) are
designed for short-term, quick cash but have predatory terms and can trap small businesses in
a debt cycle.
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