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.