Oct 06, 2011

A Visual Look at Funding – Comparing Equity vs Debt Financing [Infographic]

Business loans, angel investors and venture capitalists — in many cases, these three entities are determining the success or failure of small businesses across the country.

In this graphic, we have taken a deep look at each source of capital, have uncovered how much money is going where, and identified common considerations, compromises and benefits of each. In the end, this gives a good visual look at the state of business financing in today’s economy.

small business funding

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Small business finance has never been easy, but was it always this challenging? Not too long ago, entrepreneurs relied heavily on the support of their banker, and not just for funds but for guidance as well.

Banks today are more robust than ever. So do they still champion small business? The numbers say “probably not.” But there is evidence that the money and mentorship is still out there –- but where?

We take a look at the three leading sources of business capital today –- Banks, Venture Capital and Angels. We’ll compare not only how much money is going to whom, but also identify common considerations, compromises and benefits of each.

A Peek at Small Business in America

Debt vs Equity Financing

Especially for small or new business, this choosing between debt and equity often comes down to personal preference between control and indebtedness.

Both venture capitalists and angel investors are looking for capital growth and revenue increases and evidence that your business can deliver continued growth over time, to provide a return on investment. How these investors choose to participate in the business varies greatly.

Venture Capital – VC

Venture capital is a fund raising technique for companies who are willing to exchange equity in their company in return for money to grow or expand their business.

Angel Investors

An angel investor generally wants less control of your company and a slower return on investment, however the criteria for investment are likely to be similar to VC. Angel investor groups are great sources of private capital and frequently invest angel money into new companies.

Angels – Deals by Sector

Business Loans from the Banks

Some of the nation’s biggest banks this month pledged to boost lending to small firms by an extra $20 billion over the next three years. In 2011, loans guaranteed by the Small Business Administration hit record highs. In 2009, it was $8.6 billion; in 2010, it was $12.4 billion; in 2011, it was $18 billion.

Earlier this month, Wells Fargo became the first lender to issue more than $1 billion in SBA loans in a single year. The next top nine lenders combined have issued some $3.5 billion.

Conventional lending to small businesses by large banks continues to tighten. A recent analysis found

Buyer Beware

A recent study by the Pew Charitable Trusts has found that American households receive more than 10 million offers per month for business credit cards, and the majority of those cards have “potentially harmful terms that would not be legal on those labeled for consumer use.” That’s because consumer credit cards fall under the jurisdiction of the Credit CARD Act of 2009, while business credit cards (the primary form of financing available to most microbusinesses) remain unprotected.

However, there are good business credit cards out there with good terms. And in some circumstance, it makes sense to get a business line of credit, especially if there are big returns to be had.

It takes a little cash to change the world.

So what are you waiting for?

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  1. Nice read upon deciding what funding strategy is right for your business start up! :) Excellent infographics, btw.

  2. Nice post Dan.

    It would be interesting to see the ratio of SBA loans funded compared to conventional bank loans on a historical basis. As SBA loans have continued to go up in funding Id think that conventional bank loans have dipped. It would also be interesting if the loan amount was raised to $4 mil as I think this would be more represenative of small businesses.

    BTW, the decline ratios have to spot on.

  3. By obtaining a small business loan, it seems that from what you wrote, it makes a potential businessman to make his/her dream a reality. Great post.

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