So you want to start a business? Are you willing to risk everything … or at least something for it? Most lenders and investors want to see what you have put on the line for your dreams, before they invest in your business. In this blog, I discuss the different sources of funding for your business. I will dive into each of the different startup funding options in subsequent blogs.
Your Money. Most entrepreneurs use their own money to start a new venture. This funding might come from savings, 401(K), home-equity loans, credit cards, etc. In an ideal world, you protect your personal worth and get funding from an outside source. However, if you are not a proven entrepreneur, you will more than likely have to self-fund at least a portion of your venture. While a compelling business plan might get you some suitors, you also risk losing control of some or all of your business.
Your Rich Uncle Bob and Aunt Sue. A relationship-based investor (or what I call an emotional loan) is another alternative. Family and friends are logically the next place to seek funding for your business. How great! Not only does Aunt Sue have the money, but you are also her favorite and seeing you succeed will be repayment enough. Although borrowing from a family member or a friend is a viable option, things can also get pretty uncomfortable on the home front. Can you imagine? You have presented an impressive plan to family and friends and you have personally invested $2,000 in your business. Uncle Bob and Aunt Sue invested $1,500 each. Cousin Roy throws $200 in the pot because he feels that you are onto something and wants to get a piece of the pie. One year later, business is booming! To show your gratitude to Cousin Roy, you pay him back $1,000—$500 more than he was expecting. Yet, the relationship was still damaged: he no longer speaks to you because you refused to buy him a BMW after your company opened up its third location. (We will spend more time on mixing money and family in a later blog.)
Commercial Lending. You can also get a business loan to fund your business. The most important factor to a bank is your credit worthiness. Banks will not become enamored with your business idea. All they want to know is your likelihood of paying back the loan and if the numbers on your financial statements are realistic and in alignment with each other.
Small Business Administration (SBA)/Government-Backed Loan. The SBA is a government-run organization that offers resources to small business owners to either start a business or expand an existing business. The SBA does NOT make loans; it guarantees loans for small businesses. You must first try to secure a loan before the SBA will back a loan.
Local Government. Your state and local government have entities known as the Offices of Economic Development that provide funding and information of other sources of funding for small businesses. If you live in an area with high unemployment, you can often find funding. The government knows the importance of small business ownership to the economic stability of communities.
Financing Companies. There are financing companies that loan money to start your business or to buy equipment. Furthermore, companies like Microsoft, Dell or HP can offer you financing and/or leasing for your equipment. However, be aware that the rates and fees are often higher than a bank.
Venture Capitalists. Venture capitalists are usually companies that buy ownership into your company. These investors not only buy stake in your company, but they also get input on how your company is managed. Venture capitalists have stringent requirements. They are usually interested in seasoned entrepreneurs with a unique idea that shows extreme growth potential.
Angel Investors. Angel investors, like venture capitalists, are looking for a high return rate on their investment. They are usually wealthy individuals who reside in your backyard! Angels usually want to invest close to home. Networking is the key to finding Angel investors. These investors usually want to get their money in and out in a couple of years. Their experience can work in your favor. They impart their experience to help you build a profitable business. It is important to include an investment offering along with a payback schedule in your business plan.
Grants. I am sure you noticed the late-night ads or an invasive pop-up while browsing the Internet telling you there are secret government grants for your venture. The truth is that grants are almost always reserved for non-profit companies. The exception to this rule is grants to create products that will benefit the public or our government—especially in the technology arena. Even in this case, funding is usually limited for the proof-of-concept and prototype stages.
Small Business Contests. There are a growing number of entrepreneurial contests available from organizations trying to tap into the lucrative small business market. While these contests present many small business owners visibility, it is certainly not without risks and hassles. The requirements are often cumbersome and there are risks associated with sharing your idea.
Small business funding is a subject ingrained in the mind of most business owners. Even though the economy is rebounding slower than expected, there is funding out there for small ventures. Approximately 50% of employment comes from small businesses. However, you must have a solid business plan and you must be willing to risk your own neck in the game.
Jowanna Parris-Daley, MCP, MCSD, PMP, MBA (Entrepreneurship)
References
Sherman, A. J. Raising capital. Get the money you need to grow your business. 2d ed. New York: AMACOM, 2005.
Additional Resources
Small Business Administration – Financial Assistance for Borrowers
Small Business Administration – Venture Capital
Small Business Administration – Finance Startup
About Author
Jowanna Parris-Daley owns and operates jowanna inc™, a small business consulting company that offers business plan writing, website design and technology consulting services.
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