4 Different Ways to Fund Your Small Business

6-ways-to-fund-your-small-businessNeed funding for a new or existing small business?

There are more ways for small businesses to get financing than you’d think.

Many small business owners believe they can only get a certain kind of financing, but there’s often a much quicker, cheaper, more convenient, or less risky solution to meet their needs. They just don’t know it — YET.

That’s where we come in . . .

To help save YOU from choosing the wrong type of funding for your small business, we’ve put together a list of 4 financing options for you to consider. We’ve outlined the advantages and the risks of each choice so you don’t unintentionally lose time, money — or a stake in your business — down the road.

First ask yourself, “What TYPE of business financing should I apply for: Debt Financing, a Grant, or Equity Financing?” Each of these types is outlined below.

TYPE 1: DEBT FINANCING

Most small business financing is funded with debt financing through financial institutions. If the bank deems you “credit worthy,” they will provide you with a loan or a line of credit that comes with a repayment schedule and interest charges.

They will look at your company’s financial situation — inside and out — and you will most likely need to have a business or strategic plan in place with a solid understanding of your business’s financial situation. Banks like to see a successful track record of managing the business, a strong balance sheet, a compelling personal financial statement, and a solid credit history from the business owner.

UPSIDE:

  • You don’t have to give up any equity (ownership) in your business.
  • It’s available to companies that cannot get equity funding (see below).

DOWNSIDE:

  • You must pay back the loan plus interest charges.
  • The bank may require personal collateral (e.g., your home) from the business owner.
  • Too much debt financing can strain the business’s balance sheet and cash flow.

TYPE 2: GRANTS

Yes, businesses (not just college students and researchers) can receive grants. Several national grant programs are designed to help companies fund their innovations — especially if your business is involved in the fields of Technology or Medical Science.

You certainly don’t have to be a big business to qualify for grant monies. You could apply for the Small Business Administration’s well-known Small Business Innovation Research grant or Small Business Technology Transfer grant, or you could apply for a grant from the Center for Integration of Medicine and Technology. There are also numerous other federal, state, and minority grant opportunities available. BILLIONS of dollars are there for the asking and should not be overlooked as a potential source of funding.

UPSIDE:

  • Grants are FREE MONEY! They are funds GIVEN to you that don’t have to be repaid.
  • Investors love the financial leverage that grants provide.
  • Grants can help you offset some of the indirect costs of operating your business (e.g., heat, water, electricity).

DOWNSIDE:

  • Grants are highly competitive.
  • How you use the funds is strictly defined.

TYPE 3: EQUITY FINANCING

There are tens of thousands of companies that are financed each year by private or “institutional” investors in exchange for an equity ownership stake. These investors can include high net-worth private investors known as angel investors, sophisticated investors called venture capitalists, and shrewd investors called strategic investors. Let’s look at each of these equity investors.

A. Angel Investors — There are approximately 250,000 high net-worth private investors in the U.S. who fund over 30,000 small companies. Angel investors are typically friendly and patient about their investments. They tend to invest in groups, with each person in the group taking a small piece of the deal. The usual dollar amounts of these types of transactions is $25,000 to $1 million.

UPSIDE:

  • In addition to money, angel investors offer you business smarts and networking opportunities.
  • Angel investors are relatively patient about seeing a return on their investments.

DOWNSIDE:

  • Angel investors are often very difficult to find.
  • It can be hard to manage the divergent interests of a large group of angel investors.

B. Venture Capitalists — If you are past the start-up stage, have a quality management team, and have already begun to see success, you could be ready to approach the funding pros. Venture capitalists are a serious player in the investing world. When you talk to them, you need to keep in mind that their funding is extremely time-sensitive. They look to get their money and profits out as quickly as possible. They are a great source of funding if you are planning for meteoric growth and will require further business financing in the future to achieve it. The usual dollar amount for these types of transactions is $1 million and up.

UPSIDE:

  • Venture capitalists are an excellent source of strategic advice and business contacts.
  • They typically have more money to invest in your business if you need more funding to grow even larger later on.

DOWNSIDE:

  • You must be a “fast growth” company that is past the start-up stage.
  • You must be interested in selling the business or going public within three to five years.
  • You must be prepared to share control of your business.

C. Strategic Investors — If you need to get to market quickly, strategic investors can help. These equity investors get their name because they come from within the industry you are targeting and find what you’re selling to be “strategic” for their own business objectives. You need to be careful: Strategic investors can inundate your business with financial opportunities and choices, talk you into re-allocating your company’s resources, and even cancel their relationship with you on a whim. Make sure you have strong legal representation when engaging with this type of investor.

UPSIDE:

  • Being tied to a strategic investor enhances your credibility in the industry.
  • Money can come with access to benefits like manufacturing, distribution, and marketing support.

DOWNSIDE:

  • Strategic investors can force you to make a lot of changes to your business that you may not want.
  • Depending on the other party can be risky; if their strategy changes, they may drop their stake in you on a dime.

TYPE 4: FRIENDS & FAMILY

If none of the three types listed above proves to be an option for you, try a different approach.  For example, if you are unable to get debt financing from a bank, you may wish to consider asking a wealthy friend or relative to give you a loan to support your business. Small business financing from friends and family typically comes in relatively small amounts (usually $50,000 or less) and is given without a lot of legal hassle.

Since it’s a more personal arrangement, you might be willing to enter into an arrangement with a friend or family member that includes equity financing. Is there someone who could share in the expenses whom you wouldn’t mind working with?

Or, if you’re really lucky, do you know someone who would be willing to offer you a grant in the form of “gifted money”?

In any case, you need to be careful: Since business inherently has risks, a friend or family member’s invested or donated money could be lost and that could put a serious strain on your relationship with the person who backed you.

UPSIDE:

  • Using friends or family for financing usually means you’ll have a convenient, no-nonsense agreement with easy-to-understand repayment or equity-ownership terms.
  • It has the fewest contractual strings attached.
  • Financing from friends and family is often available very quickly.

DOWNSIDE:

  • This is a limited, one-time source of funding.
  • You must be ready for an ugly holiday meal with your relatives if you lose their money.

As you can see, selecting the right form of financing for your small business can be tricky. So take your time, and do your homework. Asking for the right amount of capital or equity from the right source can help your company SOAR.

If you need business financing for your business, let us know. The financial experts at Spectrum Capital are always just a phone call (262-456-7613) or an email away. Helping you get the right funding for your business is what we do.

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