Clearly there are many different ways to go for your source of funds, and there are several factors to keep in mind when weighing your options. Below are a few of the questions you should ask when determining what route is the best for your funding needs:
- How much money you’re looking for: This will definitely have an impact on who will be willing to loan to you. If you’re just looking for a small amount it may not be worth the time for VC’s, for example, who are looking for a large return. On the other hand, if you’re looking for 7 figures to start up your first venture, this may be a red flag for banks, which are looking to limit their risk.
- How fast your company will grow: This requirement is looked at differently by different potential financiers. Banks just want to insure that you’ll be able to pay back your debts on time, while equity investors are usually looking for a quick, large return on their money.
- Willingness to share company control: Equity funding (from VC’s and Angels) means that another party has the stake of ownership in your company, and therefore power over the decisions that are made. Some business owners may feel burdened by the extra pressure of meeting an investor’s needs, while others might appreciate advice from an experienced investor.
Once you have determined those key factors above, continue to ask yourself questions to help with the decision making. There is a huge difference in being a small retailer looking for enough money for an expansion versus a fast-growing bio-technology company looking for big venture funding. Answering these questions can help you define what type of financing is right for you:
- Are your needs short or long term?
- How quickly will you be able to pay back the loan or provide return on the investment?
- Is the money for operating expenses or capital expenditures (items that will become assets)?
- Do you need the money upfront or in smaller pieces over time?
Words of Warning
- Never begin spending debt or equity payments without first drafting the legal paperwork. Don’t get stuck in a potential lawsuit or feud due to failing to adhere to simple legal rules.
- Don’t begin spending promised yet not delivered investment money. There are often times where investments will fall through so don’t create unnecessary debt for yourself by creating financial commitments you can’t keep.
- Make sure that you are comfortable sharing ownership of your company with equity financing. Sharing ownership means sharing decision-making so try not to give away too much of your company control without being fully aware of where the power truly lies.
Now that we have discussed a brief overview of the various types of financing and the things to consider, our e-series will now go into specific details on what each type of financing option will entail.
One of the biggest uncertainties that many entrepreneurs have in the seed stage and pre-launch phase is how to get funding for their business. There are a wide variety of sources, tools, and strategies for funding your business. As a brief overview, we have summarized the most common sources of early stage funding below:
- You: Funding a startup yourself, also known as “bootstrapping,” is very common. While your funds may be limited, if you can fund your entire operation yourself, you will benefit by avoiding debt repayment while retaining full ownership of your company. Also, many other funding sources are hesitant to invest in your business if you have not invested in it yourself.
- Friends and Family: Friends and Family can often be the most generous sources for startup funding. They are likely to have fewer requirements than other sources because they know you and trust your character. Funding from friends and family is usually limited, so you may need to seek out additional funds.
- Banks: Banks provide many different options for business funding including loans, credit cards, and lines of credit. These are forms of debt funding. Unfortunately it can be difficult to get a bank loan if your business is brand new, but there are programs like SBA small business loans that can make this process easier.
- Angel Investors: Angel investors are usually wealthy individuals who make equity investments in startups with their personal savings with the hope of reaping a large return. The size and terms of investments that they will make varies by the individual investor. Some angels organize into angel groups or networks to pool their resources.
- Venture Capital: Venture Capital Firms usually invest in companies that are looking for large investments with potential for high, rapid growth and scalability. They invest large sums of money (hundreds of thousands or even millions of dollars) into startups, usually on the behalf of 3rd party investors. VC Firms are incredibly selective, usually investing in one firm out of several hundred and typically don’t invest at the early stage of a new business.
These are just some of the best known and most popular funding sources, but there are many more. If you’re not sure what type of funding is best for you, talk to people who have experience raising capital and investing in startups. Based on their experience, they may be able to make recommendations that are a good fit for your company.
In our blog series, we will individually look at each of these funding strategies, including many others, to help give you the proper business consulting you need to start your business off on the right foot.
At The Startup Garage, we know that one of the most common reasons why entrepreneurs write business plans is because they are looking for funding. The process of funding a business can be challenging and confusing, with many different ways to get funding, and a variety of requirements for each of them. With this in mind, we have created The Startup Garage Guide to Business Funding E-Series. We’ll touch on all the basics of the business funding process in order to help you understand where your business fits in. Posts in this series will include 3 major sections with thorough explanations of each program.
- Debt Financing: With Debt Financing, you are borrowing money and establishing an agreement to pay back your loan at a pre-determined time frame and interest rate. While you maintain full ownership of your company with loans, you are liable to pay back the money regardless of whether your venture succeeds or not. For a startup business, debt usually comes from banks, microloan programs, private lending, personal credit cards or friends and family. We will explain each of these debt programs in detail in our blog series.
- Equity Financing: With equity financing, you sell partial ownership of your company in exchange for cash. In this scenario, the investor assumes more risks compared to a loan because if the company fails, they lose their money and are not owed any losses. However, if the company succeeds, equity investors generally receive much better return on their investment than banks and other debt investors. If you decide to pursue equity financing, there are angel investors, venture capital firms, corporate investors, private equity firms, and friends and family.
- Alternative Financing Methods: There are many other methods of financing that do not take the traditional route of debt or equity financing. These approaches can either help raise money, or help to minimize early startup costs, helping to preserve valuable assets like cash flow and company equity. These include but are not limited to Customer and Supplier Financing, Grants, Peer to Peer (P2P) Financing, and Seller and Landlord Financing.
Despite the tough economic environment there are still ways to raise money in this day and age if you have a good business that is also a good investment. No matter what method of financing you chose, we recommend that you put together a professional business plan and speak with a trusted financial adviser. Continue to check back daily here at the Startup Garage for our full Financing E-Series as we take you step-by-step through the various methods of financing available.
Whether you have a question about startup garage guide to business funding e-series, or you’d like to discuss our business plan writing services, feel free to contact us for a free consultation!
Last year, California passed legislative to establish the structure of Benefit Corporations – a legal business structure that combines social issues with business efforts. The law took effect January 1st, 2012 and Yvon Chouinard was first in line at the Secretary of State’s office. His company, Patagonia, is an outdoor clothing, apparel, and equipment enterprise that stands for environmental compassion. The company donates portions of profits towards environmentally friendly causes and since 1986, releases statements on which chemicals are used in their product production.
With the start of the new year, California became the seventh state in the United State to pass Benefit Corporate legislation. Often confused with B-Corps, Benefit Corps are the legal entity recognized by states. They looking beyond the traditional goal of maximizing shareholder value and strive to create positive footprints on society and the environment. Read more about Patagonia and California’s new laws at The LA Times.
During his State of Union, Obama proposed new ideas that will stimulate economic growth catered towards entrepreneurs and small business owners. He stated, “Most new jobs are created in start-ups and small businesses, so let’s pass an agenda that helps them succeed.” His agenda includes job creation through innovation, an expansion on tax relief towards small businesses, doubling the tax deduction for domestic manufacturers, encouraging in-sourcing, and cutting subsidies to those who earn over $1 million.
Paying homage to one of the most recognizable figures in entrepreneurship, Obama said, “we should support everyone who’s willing to work; and every risk-taker and entrepreneur who aspires to become the next Steve Jobs.” To learn more about Obama’s small business plans, read Inc Magazine’s article here.