3 best types of funding for your biz
Jeff and Rich Sloan are America’s premier startup advisors, creators and hosts of StartupNation.com and StartupNation Radio, and authors of StartupNation: Open for Business. Lifelong entrepreneurs, the Sloan brothers have a passion for helping others learn to run their own businesses. Do you have a question for Rich and Jeff? Send them an e-mail.
By
Jeff and Rich Sloan
The founders and hosts of StartupNation.com and StartupNation radio, the Sloan brothers are eager to share their entrepreneurial knowledge.
3 best types of funding for your biz
Q: Hi Jeff and Rich. You probably get this question a lot on your
radio show, so I hope you don't mind answering it again: What is the best source of
funding for my small business?
-James
A: You're right, James. We do get asked this frequently, but we're always happy to help.
This question comes up time and again because funding is absolutely critical for small
businesses, especially startups.
Also, we've noticed that startups often go after the wrong sources of funding for their
type of business. This can lead to unwanted results, such as a shift of control out of your
hands, feuds with your financiers, wasted time, and other nasty consequences.
With this in mind, consider applying the "Goldilocks Principle" to your funding quest –
choosing the type that's "just right." To help, we've highlighted various financing options
that might fit your business.
Debt financing
Most new small businesses are funded with debt financing by financial institutions. If
you pass muster, banks provide you with a loan or line of credit that comes with a repayment
schedule and an interest rate. They'll look carefully at your company's cash flow,
collateral, and asset liquidity. You must have a sensible, written business plan, and know
your financial situation inside and out.
One way to boost your odds of success with a bank is to establish a relationship with
your banker before asking for the loan.
"This can include personal banking experience with us," says Brad Baumann, formerly an assistant
vice president at Washington Mutual. "We're always interested in attracting new customers as
well, and would consider their previous history with another financial institution."
Upside:
Downside:
Grants
If you're in technology, look into getting a grant through the United States Small
Business Administration's Small Business Innovation Research (SBIR) program. There are also
many state, regional, and minority grant opportunities.
By working with a government agency in a Cooperative Research and Development Agreement
(CRADA), you can also optimize resources and do cost-effective research – thus requiring
less funding.
Upside:
Downside:
Equity financing
Thousands of businesses are financed each year by private or "institutional" investors
in exchange for equity in those companies. These range from the simpler "friends and family"
type, to high net-worth private investors known as "angel investors," and all the way up to
the professional investors called "venture capitalists":
Friends and family: This funding typically comes
in small amounts without a lot of hassle or legal expense, but be careful. Business has
risks, and preserving your relationships with friends and family are as important as your
business opportunity.
Their comfort zone: Generally
less than $50,000.
Upside:
Downside:
Angel investors: Typically, they've earned their
nickname by 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.
Their comfort zone: $25,000 to
$1 million.
Upside:
-
More than money, they invest business smarts and networking
opportunities.
-
Relatively patient about their investments.
Downside:
Venture capitalists: Are you past the startup
phase? Are revenues coming in, and do you have a quality team in place and a clear path to
eventually sell the business or go public? You could be ready to approach these pros. But
because they were badly burned in the dot-com and biotech bubbles, VCs now have higher
standards than ever.
Keep in mind that VCs want to get their money and profits out as fast as possible.
They're great sources if you're planning for meteoric growth and will need more financing to
achieve it.
Their comfort zone: $250,000 to
tens of millions.
Upside:
Downside:
-
Must be a "fast growth" startup business.
-
Must be interested in selling the business or going public in
three to five years.
-
Must be prepared to share or give up control.
Strategic investors: These equity financiers get
their name because they're from the industry you're targeting and find what you're selling
to be "strategic" for their business objectives – such as complementing the products or
services they sell.
However, they can swamp your business with opportunity, seduce you into a lopsided
reallocation of your company's resources, restrict you from dealing with their competitors
as your customers, and even cancel your relationship on a whim. So be sure you know what
you're getting into.
Upside:
-
Enhances your credibility in the industry.
-
Money can come with access to benefits like manufacturing,
distribution, and marketing.
Downside:
Our
bottom line: Choose wisely
Some small-business financing options will be too complicated and some too risky. Others
will offer too little or too much. But if you do your homework and ask for the right amount
from the right source at the right time, you'll get funding for your startup that's "just
right" and be well on your way to business success!
Jeff and Rich Sloan are America's premier startup advisors,
creators and hosts of StartupNation.com and StartupNation Radio, and authors
of StartupNation: Open for Business. Lifelong entrepreneurs, the Sloan brothers have a
passion for helping others learn to run their own businesses.