Oct 11, 2013 05:34 PM EDT
Debt Financing
The vast majority of new small businesses are funded with debt financing via financial institutions. If you pass muster, banks can provide you with a loan or line of credit that comes with a repayment schedule and an interest rate. They will look carefully at your company's cash flow, collateral and the liquidity of your assets. You've got to have a sensible, written business plan, and you must know your financial situation inside and out. Note that one way to increase your odds of success is to establish a relationship with your banker prior to your loan request.
"In addition to showing a successful track record in managing their business, we also consider the customer's existing account relationship with the bank as one of many factors in making lending decisions - and this can also include their personal banking experience with us," said Brad Baumann, assistant vice president, regional business banking representative at Washington Mutual. "Of course, we are always interested in attracting new customers as well and would consider their previous history with another financial institution."
Grants
Especially if you're in the technology game, consider securing a grant through the Small Business Administration's Small Business Innovation Research (SBIR) Program. There are also numerous state, regional and minority grant opportunities available. By working together with a government agency in a Cooperative Research and Development Agreement (CRADA), you can also optimize resources and cost-effectively perform research (thus requiring less funding). These programs are designed to help fuel the innovative fires at small businesses. Having been on the receiving end of these grants, here's our bottom line: Billions of dollars of "free money" should not be overlooked.
Equity Financing
While debt funding is most common, there are still tens of thousands of companies financed each year by private or "institutional" investors in exchange for an equity ownership stake. They range from the less sophisticated "friends and family" type, to high net-worth private investors known as "angel investors," all the way up to the sophisticated professional investors called venture capitalists.
Friends & Family
When you can't get debt financing, consider asking your rich Aunt Harriet for a little help. As a jolt of startup funding for many a family-run business, small business financing from friends and family typically comes in small amounts without a lot of hassle or legal expense, but be careful. Always stay professional and go heavy on communication. Depending upon your priorities, realize that business has risks, and preserving your relationships with friends and family is at least as important as your business opportunity.
Comfort zone: generally less than $50,000.
Angel Investors
Do you believe in angels? We do. With approximately 250,000 high net-worth private investors in the US who fund over 30,000 small companies each year, you might be seeing wings yourself. "Angels" have earned their name by typically being friendly and patient about their investments and by providing their business wisdom and valuable relationships along with their money. They often like to invest in groups, each taking a piece of the deal.
Comfort zone: $25,000 to $1 million.
Venture Capitalists
If you are beyond the startup phase, have initial revenues coming in, a quality team in place, and a clear path to eventually sell the business or go public in an IPO, you could be ready to approach the funding pros - venture capitalists (VCs). But because they funded the dot-com and biotech bubbles and were badly burned, VCs now have higher standards than ever. Still, they remain a serious player in the investing world. Keep in mind that their funding is very time-sensitive. VCs look to get their money and profits out as quickly as possible. They are a great source if you're planning for meteoric growth and will require further business financing in the future to achieve it.
Comfort zone: $250,000 to $10's of millions. Must be a "fast growth" company
Strategic Investors
If you need to get to market quickly or perhaps short-circuit the "no name, no credibility" game, strategic investors can help. These equity financiers get their name because they come from within the industry you are targeting and find what you're selling to be "strategic" for their business objectives (such as somehow complementing or enabling the products or services they sell). But beware! They can swamp your business with opportunity, seduce you into reallocating your company's resources in a lopsided way, restrict you from dealing with their competitors as your customers, and even cancel their business relationship with you on a whim! Be sure you know what you're getting yourself into. Did someone say "lawyer"?
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