Many business owners are unsure if their business qualifies as a small business or a large business. The type of loan you receive can depend on the size of your business. You’ll also contend with different treatments and requirements.
If you’re unsure, you may be wondering about financing options for a startup vs big company.
In both cases, small and large companies can benefit from equity financing. Both types of entities can also successfully apply for public loans.
Large entities retain various advantages over startups and small businesses in terms of financing. On the other hand, startups and small businesses have an edge when applying for certain types of funding.
This article will highlight how businesses of all sizes can receive business loans. Let’s explore.
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Financing For Startups
When it comes to loans, startup companies are at a disadvantage. Many lenders prefer established borrowers.
However, more lenders are interested in startup companies. New companies and small businesses can take advantage of public startup loans and private startup loans.
Public loans usually derive from the federal government. They have lower interest rates, and they match the rates of treasury bonds.
Additionally, government agencies prioritize low-interest loans to make capital more accessible to owners. In other cases, the government will back a certain portion of the loan.
- Example: The Small Business Administration (SBA) will guarantee up to 85% of the loan. In this case, the SBA doesn’t offer loans. They merely secure a large portion of the loan for private lenders.
The SBA also backs 100% of loans for small businesses under the paycheck protection program.
Since the government backs the loan, more lenders are willing to lend you money. With that, the SBA restrictions tend to be higher than non-public loans. Moreover, SBA lenders generally prefer borrowers with a suitable credit rating (mid 600s) and a stable business history.
In some cases, a startup loan from the private sector is the better option. Many institutions cater to new business owners who don’t have the best credit. Further, private loans tend to be more flexible than public ones.
- Example: If you choose an SBA loan, the SBA forces you to pledge collateral. Pledging collateral allows lenders to seize your assets if you default.
On the flip side, private lenders are more likely to charge a higher interest rate. Lenders are in the business of making money. Therefore, they may charge a higher interest rate that you cannot afford to pay.
Financing For Large Companies
Like startups, bigger companies also need money to expand operations or enter a new market. Overall, larger companies have an easier time obtaining loans because they’re more established.
Big companies also tend to have higher credit ratings and stable cashflow. All too often, banks and lending institutions prioritize high-profile companies at the expense of startups small businesses.
Additionally, the government tends to favor large entities when it comes to public financing. In principle, the government is in the business of making loans accessible to small businesses.
Reality often says otherwise. For instance, big companies in distress have a higher chance of getting federally-backed loans than small businesses.
Benefits Of Equity Financing
Bigger firms can also raise funds through equity financing. With equity financing, you don’t have to pay back the loan. Instead, the lender will own an equity percentage of your company.
An equity stake means the lender will become a partial owner. Large companies must be careful with the equity option because lenders can take an ownership stake. Further, offering equity stakes to multiple lenders diminishes your control of the company.
Despite the cons, an equity stake has its advantages, such as:
- Greater Expertise: Perhaps the equity owner can enhance the company. They may have expertise or skills that could bring your company to new heights.
- No Monthly Payments: Businesses of all sizes tend to struggle under a monthly payment schedule, especially when revenue dips.
- No Pressure: Startups can also receive loans in exchange for an equity stake. Investors know the time it takes to start a business from the ground up. Therefore, you’re free to operate without a lender bearing down on you.
The Venture Capital Solution
Large companies tend to have a natural advantage within the lending world, but startups have advantages elsewhere. Small businesses and startups have a leg up in the world of venture capital financing.
With venture capital, a small group of investors will take an ownership stake in the company. They will normally obtain equity through a limited partnership.
Venture capital differs from equity funding because venture capital focuses on startup companies. On the other hand, equity finance is for larger companies.
Overall, the benefits of venture capital for startups include:
- Access to large pools of funding
- Helping startups that cannot obtain financing through other means
In essence, venture capitalists are looking for startups who show signs of exponential growth in the future.
Startup vs Big Company: Which Is The Best Option For My Business?
If you want to know the best loan options for a startup vs big company, both types of companies can benefit from private financing. For smaller enterprises, more private lenders are catering to startups, including owners with sub-par credit.
Large companies can gain access to private capital easily because they have a proven track record of stability. With government-backed loans, large businesses can access large amounts of capital. Startups can also take advantage of low-interest loans offered by the government.
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