Types of Business Funding for Small Businesses

Finding the right financing is one of the most crucial steps entrepreneurs can take to transform their aspirations into a profitable reality. Small business owners in Oregon have several business funding options. These range from traditional bank loans to alternative lending solutions and government-backed programs.

The best fit depends on several factors, including your business structure, your industry, and your long-term goals. Understanding whether debt financing, equity financing, or a hybrid approach is right for you can greatly impact your company’s growth trajectory.

Your business’s current financial health, creditworthiness, and cash flow will also play a key role in determining which funding sources are most accessible. By looking at all the available options, you can secure the right capital to fuel expansion, hire employees, invest in equipment, or cover day-to-day operational costs.

Debt Financing vs. Equity Financing

Before we dive into specific funding options, you should know the difference between debt financing and equity financing:

• Debt financing involves borrowing funds, typically through small business loans or lines of credit, which you need to repay over time with interest. This could come from traditional bank loans, SBA guaranteed loans, or even borrowing from family and friends. The key here is that you must pay the debt back regardless of the success of your business. In this model, the lender does not take an ownership stake in your company.
• Equity financing refers to securing funding in exchange for an ownership stake in your business. This is typically accessed through angel investors, venture capitalists, or other investment forms. These investors provide funds with the expectation of a return on their investment based on the growth of the company. Equity financing does not require repayment, but you do give up partial ownership and control of your business operations.

Understanding the differences between these two forms of financing is essential. They each come with benefits, risks, and legal and tax implications for different business structures such as a limited liability company (LLC), general partnership, or limited liability partnership (LLP).

Types of Business Funding for Oregon Small Business Owners

Now let’s explore some of the most common types of funding available for Oregon small business owners. Each of these options varies in terms of eligibility requirements, repayment terms, and control over the business operations.

Personal assets (self-funding)

Also known as bootstrapping, self-funding or financing through personal assets is a popular option for many entrepreneurs. In fact, studies show that a majority of startups fund their business using personal resources. This could mean using your personal savings account, 401(k), or even your home equity to finance your business.

The main benefit of using personal assets is that you retain complete control of your business. There is no need to involve lenders or investors, and you are not obligated to share ownership. However, there is a downside: You are personally liable for any debts or financial risks. If your business fails, your personal assets could be at risk.

Before deciding to fund your business using your own assets, it is wise to consult with a financial adviser, as withdrawing funds from retirement accounts or other assets could trigger tax penalties or fees.

Funding from friends and family

Another option is to turn to family or friends for support. This funding could come in the form of a loan or even as a gift that does not require repayment. Loans from family members often have lower interest rates than traditional bank loans and can be an easier source of capital without strict eligibility requirements.

But borrowing from friends and family also comes with emotional and personal risks. If your business faces financial difficulties, or if you fail to repay the loan, it could strain your relationships. You may also need to consider how this type of funding impacts or complicates your company’s taxes.

Another thing to keep in mind with private-party loans is that they’re subject to IRS applicable federal rates (AFRs), minimum interest benchmarks set monthly by the IRS for below-market loans, including intra-family loans, based on U.S. Treasury yields.

Small business loans

Small business loans are a traditional and reliable business financing source for many entrepreneurs. There are several options, ranging from loans offered by banks to those backed by the Small Business Administration (SBA).

Traditional bank loans: Banks offer various types of small business loans, such as term financing, lines of credit, and loans for business equipment or commercial real estate for qualifying small businesses.

These loans generally come with competitive terms and lower interest rates, but they carry stricter requirements—such as a strong credit score, an established business history, owner equity cash injection, strong cash flow, and sufficient collateral coverage.

For those just starting out, a small business loan from a large bank or community bank may be difficult to secure.

SBA loans: SBA loans are ideal for businesses that may not qualify for traditional bank loans but have good credit and have been operating for at least two years. The U.S. Small Business Administration does not make direct loans to businesses but rather backs certain loans, making them more approachable for lenders. The SBA loan guarantee adds an SBA loan fee and can serve as a backstop for some collateral shortfalls or lower credit score scenarios.

There are several types of SBA loans, including SBA 7(a) loans, SBA 504 loans, and microloans, which are designed for small businesses requiring smaller financing.

SBA loans typically have longer repayment terms and lower monthly payment amounts, making them an attractive option for many small businesses in Oregon.

Venture capital

In venture capital funding, investors provide funds in exchange for an ownership share of the business. This type of financing is ideal for companies in some growth sectors, particularly tech startups, where investors are looking for high returns on their investment.

While venture capital firms can offer substantial capital, this type of financing comes with the downside of giving up control of your business. Investors typically require a seat on the board of directors or at least some input into your business’s day-to-day operations.

Securing venture capital typically involves pitching to investors and undergoing a thorough due diligence process. This includes evaluating your business plan, financials, market potential, and management team.

Venture capital can be a great option if your business needs large sums of capital and is poised for rapid growth. But it requires equity financing, meaning you will give up part of your company in exchange for the funds.

Once capital is secured, funding is usually provided in rounds, contingent upon meeting certain business milestones. This allows for positive cash flow and growth without taking on debt.

Crowdfunding

Crowdfunding has grown in popularity over the past decade, with platforms such as Kickstarter and Indiegogo providing opportunities for small businesses to raise capital from a broad range of small investors. This is particularly beneficial for businesses with unique or innovative ideas that can appeal to a large audience.

There are four main types of crowdfunding:

• Donation-based: Donors give money to support a business with no expectation of a return.
• Equity-based: Investors provide funds in exchange for equity or shares in the business.
• Debt-based: Investors provide funds with the expectation of repayment plus interest.
• Reward-based: Contributors receive products or services in return for their financial support.

Crowdfunding allows small businesses to raise funds and also test-market their products or services. But it is important to remember that not every crowdfunding campaign will be successful. With thousands of businesses competing for attention, creating a compelling pitch and offering valuable rewards or incentives is essential for success. 

Crowdfunding can be a great way to build brand awareness and reach new customers, but it does require strategic marketing to gain traction. Crowdfunding may also be considered taxable income depending on the circumstances.

State and Local Funding for Oregon Small Businesses

In addition to the federal funding options, Oregon offers several state and local government funding programs to help small businesses secure financing. In addition, there may be small business grant opportunities in your county or region of the state. Connect with an SBDC adviser to learn more.

Business Oregon’s loan programs

Business Oregon, the state’s economic development agency, offers various programs to support business growth, job creation, and innovation. Some key programs include:

• Oregon Business Development Fund (OBDF): Provides fixed-rate financing for businesses expanding or creating new jobs.
• Entrepreneurial Development Loan Fund (EDLF): Helps startups and small businesses that may not qualify for traditional loans.

Community lending programs

Many cities and counties in the state of Oregon offer community development financing programs in the form of business loans, grants, and incentives to encourage economic development. Check with your city or county economic development office to help identify additional funding resources tailored to your location.

These state and local resources can be valuable for entrepreneurs who may not qualify for traditional financing or are looking for alternative ways to secure funding.

How the Oregon SBDC Network Can Help You Access Business Funding

The Oregon Small Business Development Center’s Capital Access Team (CAT) is a valuable resource for small business owners seeking guidance on securing funding.

The Capital Access Team provides specialized advising, training, and support services to help you navigate the complexities of obtaining business financing. CAT advisers, many of whom are retired career bankers, offer expert one-on-one guidance to help business owners become “funding ready.”

Through an initial readiness assessment, business owners receive assistance with business planning, financial projections, and the development of a tailored finance strategy. CAT advisers also help entrepreneurs understand the capital landscape in their local area, including both traditional and alternative funding sources, and provide feedback on funding applications.

Additionally, CAT clients receive coaching on funder relations, pitch preparation, and eligibility for different financing options. By working closely with CAT advisers, business owners gain a deeper understanding of financial management and greatly increase their chances of securing funding. To get started, register for confidential business advising with your local SBDC, and they can connect you with a CAT adviser. With the help of the Oregon SBDC Network, you can gain the confidence and knowledge needed to secure the proper funding for your business.