Friends and Family
Just like it sounds, raise money from people you know well, either in exchange for equity or as a loan to be repaid.
Upside
- This option has the fewest contractual strings attached, although you should still draw up a contract to protect your friend's or family member's investment.
- Funds are typically available quickly.
Downside
- This is usually a limited, one-time source of funding.
- You are spending your friend's or family member's money - so do so wisely, and be prepared to deal with the consequences if your business does not succeed.
Resource
To better manage loans between friends and family, Circlelending provides a full range of services for managing financial transactions between private parties.
Angel Investors
Angel investors are individuals who invest in companies at an early stage in exchange for equity and the chance to help guide the company. In contrast, venture capitalists invest as a profession and generally on behalf of other investors.
Generally one is ready to approach angels when they have exhausted their friends and family but are not yet ready to approach venture capitalists for money.
Approach angels if you are looking for large amounts ($25K to $1M) of "smart money" - the people who provide this form of funding have already "made it big" in their own careers and can help guide you to do the same.
Upside
- Angels invest more than money - they provide mentoring and contacts.
- Angels are patient about their investment.
- There are no monthly payments with this type of financing - angels make their money when you achieve your business' exit strategy.
Downside
- Angels are difficult to find.
- Angels deserve regular and thorough reporting, which can take up valuable time.
- You are giving up equity in your company.
Factoring
Factoring is where the financial institution (factor) advances the entrepreneur money against proceeds from the entrepreneur's outstanding accounts receivables. Factoring firms generally are paid a percentage of the invoice's value.
Upside
- Provides funds quickly, when they might not otherwise be available.
- Helps companies with an unsteady and unbalanced cash flow.
Downside
- Factoring requires increased accounting oversight and administration.
- A substantial "cost of money" is involved in factoring. A hefty portion of your receivables will go the way of the factoring firm.
- Your customers are actually paying a factoring company rather than you.
Venture Capitalists
Venture capitalists are individuals or companies with large amounts of capital to invest and expect higher returns.
Use Venture Capitalists if you already have a great track record in your field or as an entrepreneur, and if you have a business concept that will require a lot of money ($250K to $10s of millions) and will have a rapid growth curve.
Upside
- VCs invest smarts and networking, in addition to money.
- VCs typically have more money available if you need it to grow down the road.
Downside
- VCs typically only invest in established companies.
- You must be willing to give up significant control over major decisions for your company.
- You must have a "fast growth" company.
- You must have an aggressive exit strategy to sell your business or do an IPO within 5-7 years.