Beginning this week, startup experts Jeff and Rich Sloan will alternate with Steve Struass in answering readers’ questions. 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.

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, 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.”

• You don’t have to give up equity.
• It’s available to companies that can’t get equity funding.

• You must pay interest.
• Limited networking or "business savvy" value.
• May require such personal collateral as your home.

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.

• It’s free money.
• Investors love the “leverage” that grants provide.

• It’s highly competitive.
• There are strict guidelines for using the funds.

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.

• Convenient, no nonsense.
• Fewest contractual strings attached.
• Available quickly.

• Limited one-time source of funding.
• Be ready for an ugly Thanksgiving dinner with your in-laws if you lose their money.

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.

• More than money, they invest business smarts and networking opportunities.
• Relatively patient about their investments.

• Often hard to find.
• It can be hard to manage the various interests of a large group of angels

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.

• VCs invest smarts and networking in addition to money.
• Typically have more money if you need more to grow.

• 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.

• Enhances your credibility in the industry.
• Money can come with access to benefits like manufacturing, distribution and marketing.

• Can force you to recalibrate your entire business to serve them.
• Dependency can be risky.
• Can prohibit you from selling to their competitors.

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. Do you have a question for Rich and Jeff? Send them an e-mail.