March 3, 2013
Creating, Financing, and Marketing a Business
A partnership is a voluntary agreement under which two or more people act as co-owners of a business for profit (Kelly & McGowen, 2012, p. 76). There are some advantages of this form of agreement whereas each partner has the right to participate in the company’s management and share in profits and losses, but also has unlimited liability for any debts the company incurs. A partnership is easier to establish compared to a corporation. Each partner will share start-up cost, and reciprocate support and motivation. Partnership earnings that pass through the business are taxed only as the partners’ personal income. In contrast to, unlimited liability, partners are jointly and individually liable for the business activity of the other. If a partner withdraws from the partnership, he is still responsible for any debt the business had at the time of withdrawal, it does not matter who created the obligation. Decisions are shared and differences of opinion can lead to disagreements, which can lead to one partner buying out the other.
The various funding options for small businesses offer an individual an alternative to partnership. Federal, state, and local governments have all created government subsidy or incentive programs try to facilitate small business funding. Commercial banks and private investors also play a key role in funding small businesses. The business owners often provide most, if not all, of the funding for a start-up small business (Fowler).
The small business owner uses their own personal savings or personal assets to fund the small business. Although this option is the most common, it is also in many respects, the least desirable funding option because it involves the most risk for the small business owner. Small business owners put their personal financial well-being on the line (Fowler).
Government programs exist at the federal, state, and local level to help fund new or expanding small businesses. The Small Business Administration is the largest federal funding source for small business. The SBA directly issues some SBA loans, but commercial lenders administer the large majority of SBA loans (Fowler). An SBA loan is a commercial loan guaranteed by the federal government. The federal government's guarantee of the loan allows commercial lenders to provide loans to small businesses that otherwise would not qualify under purely private loan programs. State and local programs also provide funding options for small businesses, including both loans and grants. “The SBA also has a microloan program that lends small amounts of money, $13,000 on average, to start-up businesses through community nonprofit organizations” (Kelly & McGowen, 2012, p. 93).
Equity financing means giving up a share of ownership in the business in exchange for capital to operate the business, which can sometimes be as high as 60%. If they have a new business idea but no money to invest, and an insufficient credit history to obtain a commercial loan, they can go into a partnership with somebody who has money to invest. The person who invests the capital to start the business or to keep the business afloat will take an equity position, or ownership position, in the business. An equity investor becomes the business partner (Fowler).
Banks and credit unions provide commercial loans for small businesses. The commercial lender provides cash to the business owner at the time of loan closing, and the business owner must pay that money back over time with interest. Commercial lenders will require some type of valuable property for collateral for the loan as well as a steady and reliable history of revenue produced by the business. Because many small businesses have insufficient revenue or credit history, commercial lenders often require…