Find the Funding
This is a critical step. You’ve got to find funding for your business but ensure that it’s the right kind of funding. Yes, there’s the adage, “beggars can’t be choosers,” but the fact is, you must be selective and smart when seeking money for your startup or it could turn your dream business into a nightmare.
To identify which form of financing is just right for you, think about your long-term personal and business goals and the type of business you’re planning to launch.
We dedicate a whole chapter to this subject in StartupNation: Open for Business to ensure that you understand what we call the “Goldilocks Approach,” a way for you to find the funding that’s the right amount at the right time with only the right “strings” attached.
We will tackle seven ways to fund your business in this step:
- Debt Financing
- Friends and Family
- Angel Investors
- Venture Capitalists
Ways to Fund your Business
Look no further than yourself to find the funding you need—perhaps using your savings, your initial revenues, credit cards, equity pulled from your home, etc.
- You maintain complete financial and operational control over your business.
- No equity-holders to pay off if the company hits it big.
- If you are able to use savings, you won’t have monthly payments to add to your business’ expenses.
- If the business fails, you may face a lot of personal debt.
- Depending on the source of your personal capital, you may end up paying a high interest rate (if you use a credit card), or you may miss out on earning interest (if you use savings).
- Typically, this form of funding limits the amount of money you have for strategic purposes and the rate of growth of your business can be significantly slowed down as it starves for cash.
Debt financing requires that you qualify for a traditional bank loan (not common for raw startups), or that you find a bank that can provide you a loan with a SBA guaranty.
Before you land a loan, you need to understand how to maximize your odds for success in landing a loan. The lending process is inherently a tough one, but it’s also a system that has been the catalyst of success for many small businesses. In fact, some entrepreneurs would say that their relationship with their banker has been the pivotal ingredient to growth.
- You don’t have to give up equity, proceeds or control in order to get funded.
- You build a powerful relationship with your banker that can open up additional forms of debt financing you may need down the road.
- Bank loans typically go to existing small businesses with 2 years of history and credit.
- You must pay interest, and if you don’t keep up with your loan payments, you could find yourself in a tough spot with the bank.
- You may be required to provide personal collateral, such as your home, to obtain the loan.
Grants are special programs designed to fuel the innovative fires of small businesses, and typically target specific groups or types of businesses, such as technology businesses, veteran-owned businesses, women-owned businesses and minority-owned businesses.
- You don’t pay interest – grants are essentially “free money.”
- Potential investors (should you be seeking additional funding) love the “leverage” that grants provide.
- The competition is stiff for grants, and grant writing (applying for the grants) is an art form, so you may want to find a grant writer to help you.
- How you can use grant funds is strictly defined by the organization that provides them.
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.
- 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.
- 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.
To better manage loans between friends and family, Circlelending provides a full range of services for managing financial transactions between private parties.
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.
- 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.
- 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.
Here’s a directory of angel investor networks and organizations that link entrepreneurs to angel investors.
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.
- Provides funds quickly, when they might not otherwise be available.
- Helps companies with an unsteady and unbalanced cash flow.
- 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 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.
- VCs invest smarts and networking, in addition to money.
- VCs typically have more money available if you need it to grow down the road.
- 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.