How does income-based financing work?
Posted: Thu Jan 23, 2025 3:50 am
Figuring out how to finance your business is almost as important as figuring out how to run your business. Changes in the financial landscape over the past decade have meant that startups have more options to get started, while some classic options have changed for the worse.
Bank lending, in particular, has gone a bit over the edge. A Harvard Business School report on the state of small business lending notes: “The share of small business lending in total bank lending was about 50 percent in 1995, but only about 30 percent in 2012.”
startup funding model
This is exacerbated by bank consolidation, where smaller community banks and credit unions are bought up by larger institutions. This leaves entrepreneurs with fewer bank lenders to turn to.
Fortunately, there are plenty of other traditional financing dentist database options, as we'll see, and some more modern options, as we'll also see. Choosing the right option involves understanding what your loan looks like, how much you need, what you're willing to give up, and who you're willing to be beholden to.
No company is going to use just one of these options. As your business grows, you will need new funding, seek new partnerships, and tire of other funding options. I present them in rough chronological order based on when a typical business might turn to each option.
Family and friends
People who have already given you so much are often the first to offer more. Family and friends know you and may even have had some input into your early business plans.
When borrowing from these people, you must be careful not to treat their money any differently than cash from another source. Make a contract, pay interest, and stick to a regular repayment schedule.
No one wants to spend five years fighting with their family over a misunderstanding. Are they partners, creditors, or owners? Find out before you accept any money from them, and make sure everything is written down.
Who is it for? People with a strong network of loved ones who are happy to lend money. People who need capital for small investments. People who buy assets that are being sold and therefore do not bear the same risk as hiring an employee. No one wants to lose their friends' money.
Who should you stay away from? People who need a lot of money - I guess it depends on your family and friends. People who don't want the hassle of a bank - you should treat them like bank loans. People who don't enjoy Thanksgiving at Aunt Debbie's anymore.
Bank lending, in particular, has gone a bit over the edge. A Harvard Business School report on the state of small business lending notes: “The share of small business lending in total bank lending was about 50 percent in 1995, but only about 30 percent in 2012.”
startup funding model
This is exacerbated by bank consolidation, where smaller community banks and credit unions are bought up by larger institutions. This leaves entrepreneurs with fewer bank lenders to turn to.
Fortunately, there are plenty of other traditional financing dentist database options, as we'll see, and some more modern options, as we'll also see. Choosing the right option involves understanding what your loan looks like, how much you need, what you're willing to give up, and who you're willing to be beholden to.
No company is going to use just one of these options. As your business grows, you will need new funding, seek new partnerships, and tire of other funding options. I present them in rough chronological order based on when a typical business might turn to each option.
Family and friends
People who have already given you so much are often the first to offer more. Family and friends know you and may even have had some input into your early business plans.
When borrowing from these people, you must be careful not to treat their money any differently than cash from another source. Make a contract, pay interest, and stick to a regular repayment schedule.
No one wants to spend five years fighting with their family over a misunderstanding. Are they partners, creditors, or owners? Find out before you accept any money from them, and make sure everything is written down.
Who is it for? People with a strong network of loved ones who are happy to lend money. People who need capital for small investments. People who buy assets that are being sold and therefore do not bear the same risk as hiring an employee. No one wants to lose their friends' money.
Who should you stay away from? People who need a lot of money - I guess it depends on your family and friends. People who don't want the hassle of a bank - you should treat them like bank loans. People who don't enjoy Thanksgiving at Aunt Debbie's anymore.