For a small business owner there are two options of financing, one way is through sources of equity financing where a business will look to non-professional investors such as friends, relatives, employees, customers, or industry colleagues to raise start-up capital or increase growth capital.Also, with equity financing there are Corporate Venture Capital, Venture Capital Firms, Angles, and Partners to consider in finding the capital needed for your business. Usually by financing your business through any of these methods you are receiving capital but may be losing part of your ownership. (Scarborough & Zimmerer, 2003)
The second option of financing is with debt financing. This is when a business borrows the money for capital and repays the lender back with interest. Unlike equity financing, debt financing allows business owner's to keep all of the business control and this method can be a better option for established businesses. One very popular source for debt financing is through commercial banks. Another source for debt financing is through a non-bank source such as asset-based lenders. These lenders although smaller then most commercial banks and finance companies are able to finance to the smaller businesses by having owner's put up collateral to insure the repayment of the loan. (Scarborough & Zimmerer, 2003)
As for Custom Stitches, the best option would with debt financing. If Andy was to borrow his capital with a source of equity he may have a harder time finding friends and family members to borrow $700,000 from. Also, if he was to borrow money from friends or family it may cause more problems such as misconstrued expectations of the business. In addition to financing, Angels and Venture Capital Firms purchase equity in a small yet potentially successful business in exchange for capital. These firms share ownership in the business, which could mean a loss of control for Andy. These firms also have an intense screening process for small businesses and out of thousands of proposals a year they may only select one percent to invest in. (Scarborough & Zimmerer, 2003)
In Andy's case he has a far better chance of receiving a loan through a commercial bank and even though his loan must be repaid with interest he will have the opportunity to remain the sole proprietor of Custom Stitches. With his rate of growth the interest on the loan should not be an issue for his business. As for the type of loan Andy should receive he should consider an intermediate- and long term loan. These loans are usually for a year or longer and are used to increase fixed and growth-capital balances. Even though these loans are usually granted to start a business, purchasing equipment or real estate, and other long term financial situations, I feel that since Custom Stitches needs a large amount of capital to reach their goal of doubling their growth that their situation will also fit within the criteria of this loan. (Scarborough & Zimmerer, 2003)
