Financing a start-up or expansion of an existing business is a daunting task.
There are many options to consider when seeking funding. Your business plan should include a description of how you plan to seek funding and describe how you will operate under the possible funding sources. Key factors to consider regarding your funding options include how much control you are willing to give up and payback or buy out of your funding source. The general categories of funding sources include individuals, other companies, and lending institutions.
Individuals include friends, family, and angels. Funding through individuals is most probable if you aren’t looking for a lot of capital. An important consideration when looking for financing through friends and family members is the conditions that will come with the money. How much work will be involved with giving your investors progress reports and/or seeking approval for business decisions? Friends and family can be the ideal investors or they can be your worst nightmare. If you have multiple small investors, think through how they will each be paid back. Put both payback terms and business operating conditions in writing and follow them closely.
Angel investors may be easier to deal with than friends and family. If the individual has funded other businesses, check with the other business owners to find out how smoothly the experience went. Also, find out what kind of terms were used. Will they work for you? Angel investors will likely need more of a sales job on the opportunity than friends and family. If you are approaching angels, be sure your business plan is focused on them rather than your product or service. The plan needs to clearly show the individual what the benefits are in funding you, as well as identify the risks. As with friends and family, put payback terms and operating conditions in writing. Be sure to clearly spell out what sort of business decisions the investor will be consulted on and how disagreements will be handled.
Other companies that may fund a business primarily venture capital groups. Business plans used to secure venture capital funding need to have realistic and in-depth competition analysis and clearly show the benefits of the investment. Risks associated with the investment may need to be quantified and you may need to be willing to undergo an in-depth review or audit of your finance and business management practices. Funding through venture capitalists will be more formal compared to working with individuals. Also, pay-back terms will likely be stricter. Venture capital firms are in it for the money. Poor performance on the part of management can quickly become the basis for taking over the company. Verify references for venture capital firms with other businesses that also received funding. Venture capital firms are good prospects when you are looking for a large dollar figure. Some venture capital firms also have networks of service providers that can help you run your business such as lawyers, accountants, and trainers.
Lending institutions are excellent resources for small business funding. If you don’t want to deal with a lot of investor care and your business is relatively low-risk, definitely consider a loan. Your financials will need to support meeting a regular payback schedule to secure a loan. The Small Business Administration (SBA) makes loans to small businesses routinely with a quick turn around. There are 70 SBA districts across the country. SBA loans are made through banks and other institutions. The first step in getting a loan is to contact a bank. Through the SBA web site, www.sba.gov, you can find SBA lenders in your area. You will complete an application and submit it to the lender. The lender will submit your application to the SBA for approval. After approval, the lender disburses the funds.
The SBA has several loan programs. Large loans for almost any purpose fall under the 7(a) program. Businesses involved with real-estate development, investment, or speculation are not eligible for SBA loans. SBA approval for 7(a) loans is around 10 days. Other loan programs are available for smaller amounts and generally take less time to process. Other funding programs available through the SBA include micro-loans for less than $50,000, small business investment company programs, new markets venture capital, and surety bond guarantees for construction companies.
In addition to funding, the SBA offers many programs and expert advice for small businesses. Much of the support is available free of charge. So even if you find funding through individuals or companies, it is worthwhile to visit the SBA website for access to other resources that will assure success for your business.