There are various ways and sources from which small companies are able to obtain financing but it’s important that you know the steps you need to take and are able to ask the right questions as you move through the process.
1. Look Inward. You need to know exactly what you want and what the benefits are to obtaining someone else’s money. Think about the goals of the company and what you are trying to accomplish and even think in terms of how your business helps your community (what problem do you solve). If you started out with one location for example and you want to expand to ten then it needs to be clear how you are going to do that and what it will coast to get there.
2. Do not underestimate the amount of money needed. Even if you are still a very small enterprise but have big plans make sure that the amount of money requested is in line with your goals. Do not be shy in this matter because funding sources will not see you as being conservative but rather unrealistic and perhaps a poor manager. Highball the number; just make sure it’s reasonable given your need for capital, your going to need the money anyway.
3. Get Organized. Now that you know what you need the money for and how much you need it’s time to start talking to people that can help. You will want to set an appointment with your accountant and get your financial statements in order. This applies to both your business and personal financial statements. If you have CPA audited financial statements you are ahead of the game and your eventual funding sources will greatly appreciate that level of seriousness and organization. You need your personal financial information prepared as well because you never know what type of documentation a lender or equity investor will require. Side Note: Do not make the mistake of believing that because the money is for your business that there will be no lien requirements on personal assets such as your home.
4. Meet Your Banker. You know what you want, need, and have the information to back it up. Your banker will be pleasantly surprised to see you so prepared and organized. Your first meeting should be exploratory where you discuss your plans and needs and the bank provides some information on their capabilities. They will most likely ask for the last two year end and interim financial statements and possibly tax returns. Give it to them to analyze and come up with ideas. Your banker can be a wealth of knowledge and great contact source for other service providers even for other funding sources since your bank cannot do everything.
5. Small Business Development Centers. If you have Small Business Development Centers in your state they can be a great resource for obtaining contacts and information. In my state, Maryland, we have an excellent center with branches throughout the state. Here you can schedule appointments with a counselor who can help guide you through the process of obtaining capital and answer questions along the way offering advise on various business matters. It has been my experience that these are very experienced and knowledgeable counselors and not just some half baked state run program. You should schedule an appointment and go meet with them.
6. Get referrals. Your accountant, banker, business counselor, and other business owners all have contacts that expand beyond the bank when it comes to financing. Yes, even your banker will be happy to provide you with contacts for alternative sources of financing that go beyond the banks abilities or risk parameters. He will do this to keep you happy and coming back to him for all your banking needs. Your accountant is constantly bombarded by third party funding sources seeking referrals so he should be very aware who the various players are that cover your market.
7. Invest Wisely. By now you should have at least one commitment letter on the table that will outline the terms of the deal. If you follow these simple steps the funding process will move quickly and smoothly. Once you do, make sure you leverage those funds for maximum profits so that next time the financing process will be a walk in the park.
By Bill Ryon
Bill Ryon is a business finance expert living in Maryland. He has helped dozens of companies from coast to coast obtain the most advantageous forms of financing leading to greater opportunity and profits. For more information you may send questions via email to wgryon26@comcast.net Website and newsletter coming soon.
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Small Business Financing: 7 Steps to Obtaining Growth Capital
Financing for Your Small Business Start Up
The number one question I get asked as a small business start-up coach is: Where do I get start-up cash?
I'm always glad when my clients ask me this question. If they are asking this question, it is a sure sign that they are serious about taking financial responsibility for start it.
Not All Money Is the Same
There are two types of start-up financing: debt and equity. Consider what type is right for you.
Debt Financing is the use of borrowed money to finance a business. Any money you borrow is considered debt financing.
Sources of debt financing loans are many and varied: banks, savings and loans, credit unions, commercial finance companies, and the U.S. Small Business Administration (SBA) are the most common. Loans from family and friends are also considered debt financing, even when there is no interest attached.
Debt financing loans are relatively small and short in term and are awarded based on your guarantee of repayment from your personal assets and equity. Debt financing is often the financial strategy of choice for the start-up stage of businesses.
Equity financing is any form of financing that is based on the equity of your business. In this type of financing, the financial institution provides money in return for a share of your business's profits. This essentially means that you will be selling a portion of your company in order to receive funds.
Venture capitalist firms, business angels, and other professional equity funding firms are the standard sources for equity financing. Handled correctly, loans from friends and family could be considered a source of non-professional equity funding.
Equity financing involves stock options, and is usually a larger, longer-term investment than debt financing. Because of this, equity financing is more often considered in the growth stage of businesses.
7 Main Sources of Funding for Small Business Start-ups
1. You
Investors are more willing to invest in your start-up when they see that you have put your own money on the line. Therefore, the first place to look for money when starting up a business is your own pocket.
Personal Assets
According to the SBA, 57% of entrepreneurs dip into personal or family savings to pay for their company's launch. If you decide to use your own money, don't use it all. This will protect you from eating Ramen noodles for the rest of your life, give you great experience in borrowing money, and build your business credit.
A Job
There's no reason why you can't get an outside job to fund your start-up. In fact, most people do. This will ensure that there will never be a time when you are without money coming in and will help take most of the stress and risk out of starting up.
Credit Cards
If you are going to use plastic, shop around for the lowest interest rate available.
2. Friends and Family
Money from friends and family is the most common source of non-professional funding for small business start-ups. Here, the biggest advantage is the same as the biggest disadvantage: You know these people. Unspoken needs and attachments to outcome may cause stress that would warrant steering away from this type of funding.
3. Angel Investors
An angel investor is someone who invests in a business venture, providing capital for start-up or expansion. Angels are affluent individuals, often entrepreneurs themselves, who make high-risk investments with new companies for the hope of high rates of return on their money. They are often the first investors in a company, adding value through their contacts and expertise. Unlike venture capitalists, angels typically do not pool money in a professionally-managed fund. Rather, angel investors often organize themselves in angel networks or angel groups to share research and pool investment capital.
4. Business Partners
There are two kinds of partners to consider for your business: silent and working. A silent partner is someone who contributes capital for a portion of the business, yet is generally not involved in the operation of the business. A working partner is someone who contributes not only capital for a portion of the business but also skills and labor in day-to-day operations.
5. Commercial Loans
If you are launching a new business, chances are good that there will be a commercial bank loan somewhere in your future. However, most commercial loans go to small businesses that are already showing a profitable track record. Banks finance 12% of all small business start-ups, according to a recent SBA study. Banks consider financing individuals with a solid credit history, related entrepreneurial experience, and collateral (real estate and equipment). Banks require a formal business plan. Before giving you a loan, they also take into consideration whether you are investing your own money in your start-up, or not.
6. Seed Funding Firms
Seed funding firms, also called incubators, are designed to encourage entrepreneurship and nurture business ideas or new technologies to help them become attractive to venture capitalists. An incubator typically provides physical space and some or all of these services: meeting areas, office space, equipment, secretarial services, accounting services, research libraries, legal services, and technical services. Incubators involve a mix of advice, service and support to help new businesses develop and grow.
7. Venture Capital Funds
Venture capital is a type of private equity funding typically provided to new growth businesses by professional, institutionally backed outside investors. Venture capitalist firms are actual companies. However, they invest other people's money and much larger amounts of it (several million dollars) than seed funding firms. This type of equity investment usually is best suited for rapidly growing companies that require a lot of capital or start-up companies with a strong business plan.
by Susan L Reid
Small Business Start Up Coach provides value, inspiration and direction to entrepreneurial women starting up and launching small businesses. Accidental Pren-her™ providing a place for pren-hers to share stories, build community, and embrace their inner Samurai.
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