As an entrepreneur with a good business idea or a small business owner looking to expand, one of the main issues you are highly likely to face is how to finance your idea or business. The good news is that there are usually several options open to you if you know where to look, so it is usually a matter of finding out which suits your needs best, and how to become eligible to obtain such funding.
The large majority of startups and small businesses are financed through debt provided by financial institutions. If you fulfill the necessary requirements set by the bank, you can be provided with a loan or a line of credit, with a set amount of interest, and with a requirement to be paid back according to a repayment schedule. The bank will want to take an in-depth look at all your company’s financial records, so it is important to make sure that all your financial documents are well organized, with no gaps in your records from start to present. The bank will also want to know what assets your company has, some or all of which is likely to comprise the collateral in return for the debt. If the loan you seek is for a startup, it will be important to have a solid, written business plan, preferably based on a feasibility or market study. In either circumstance, you must know your financial standing inside out, and it always helps to have a pre-existing and positive relationship with the bank – for example through personal banking.
Grants provided by the government or by other organizations are amongst the best ways to get financed, since they are practically “free money” and do not usually require giving up collateral or equity in return. The main caviot here is that grants can be very industry-specific (for example, they maybe more available in technology industries than in the construction industries), and even then, grants are highly competitive. Further, once the grant is received, how you use the funds is often strictly defined.
Equity financing is when a private or institutional investor funds a business in exchange for an equity ownership stake in the business. This includes anything as sophisticated as a venture capital firm, or a private investor also known as an “angel investor”, or simply a friend or family member.
Venture capitalists can be distinguished from other types of equity investors in that their funding is provided beyond the startup phase. They will mainly seek businesses that are already producing some initial revenues, have a clear plan of expansion in place, and are looking at a likely and considerable upcoming growth (or profitable sale of the business). As such, their funding is somewhat time sensitive: a venture capitalist is not looking for a very long term investment that generates profits steadily over many years, but instead to get their money and profits out as quickly as possible. Of course this type of funding will mean sharing control of your business, but on the upside you will be gaining valuable networking ties and access to skilled investment advice, in addition to a larger amount of funding than other types of investors.
Angel investors are affluent individuals looking to invest their money in new or growing businesses in return for a piece of the action. Often they are successful entrepreneurs who want to help other entrepreneurs succeed, and at the same time make a higher return than they would from a traditional investment. Keep in mind that the business network and experience that an angel investor can bring to your business can be as valuable as the money they put in. The funding they provide is typically lower than that of a venture capitalist, but probably higher than what you would be able to raise on your own.
That all sounds wonderful, but where can we get our very own angel? Networking heavily is a good start. People looking to give away their money do not tend to come looking for you. It helps if you are introduced or recommended by someone who knows you, and this is generally achieved by having a healthy business network. It would also be helpful to know that often angel investors operate in groups where they pool their resources and share the risks. Such groups are not difficult to find online. It is key to remember to be ready for the investors before you meet them; if your idea or business is not well put together and convincing, the investors will just as easily look you over and move on to the next opportunity.
Last but not least, it is always possible to gather funding from friends or family members. Although this funding comes in smaller amounts, the benefit is that it is usually involves less hassle and expenses. But do not be fooled: it is crucial when dealing with personal contacts to keep things very professional. Depending on the circumstances, keep in mind that every business has its risks, and preserving the relationship you have with the family member or friend may also be at risk. Also unlike an angel investor, just because they have money, it does not necessarily mean they have good business sense or experience, and therefore giving them a stake in the business and a hand in running it may prove tricky. This can be avoided by drawing out agreements beforehand to clearify the boundaries of the investor’s involvemnt in the business.