There are a number of financing options for startup businesses. It is essential to take your time to find the one that is ideal for your situation. The following information will not only help you consider the options available, but also let you know the pros and cons each option offers.
Funding for the majority of new startup businesses comes from debt financing. If you pass the requirements, a bank provides you with a line of credit or loan with a repayment schedule attached, as well as an interest rate. Prior to issuing this loan, the bank will look at the cash flow you have, as well as your collateral and your asset liquidity.
In order to qualify for this type of financing, you must have a comprehensive business plan and know the ins and outs of your financial situation. It is always a good idea to develop a relationship with your banker prior to actually making the loan request.
Pros of Debt Financing
• Provides funds you do not have to pay back
• Provides leverage investors will appreciate
Cons of Debt Financing
• You may be required to offer a personal type of collateral, such as your home.
• You must pay interest.
For any business that is venturing into the realm of technology, they should consider a grant from the Small Business Administration’s Small Business Innovation Research (SBIR) Program. Additionally, there are state and local grants offered grants for startup businesses.
Pros of Grant Financing
• You are not required to give up any of your business’s equity.
• This option is available to any business unable to receive equity funding.
Cons of Grant Financing
• It is highly competitive to receive a grant.
• There are strict requirements on your use of funds received from a grant.
There is no question that equity financing is the most popular financing option for a startup business. Thousands of businesses receive funds annually from an institutional investor in exchange for a certain percentage of equity in their company. You obtain this type of financing from family, friends, or “angel” investors. Angel investors are private investors with large bankrolls or professional investors known as venture capitalists.
Family and Friend Financing
If you are unable to receive debt financing, you may consider asking a rich relative for the funds. In most cases, this type of financing will come without many legal issues or much hassle, but you should still be careful. Be sure that you stay professional with the person from whom you borrow the money and communicate clearly. You should also keep in mind that all business ventures come with risks. Borrowing money from family or a friend may lead to a riff in your relationship if issues arise. A general guideline is not to borrow more than $50,000.
Pros of Family and Friends Financing
• No nonsense and convenient
• Few actual contractual strings attached
• Able to get the money quickly
Cons of Family and Friends Financing
• Only a one time source of funding
• Loss of money may hurt relationships
There are over a quarter of a million private investors around the world with high net worth currently funding over 30,000 startup and small companies every year. The “Angels” have earned their name because of their patient and friendly attitude toward investors. They often offer truly invaluable business wisdom. In many cases, they like to invest as a group, each member one taking on a part of the deal.
Pros of Angel Investor Financing
• Offer more than just money, as these investors provide knowledge, wisdom, and advice for business owners.
• Patient about the investments that they make
Cons of Angel Investor Financing
• Can be fairly difficult to find
• If a group invests in your venture, you may find it difficult to manage all of the various interests expressed.
A venture capitalist usually enters the picture only when you have made it past the initial, startup phase of your business endeavor. These types of investors want to see your revenues and your plan to either sell the business or go public with an IPO (initial public offering). The standards of a venture capitalist are extremely high, but they can be valuable partners in your business venture.
Pros of Using Venture Capitalist Funding
• Invest not only money, but also experience and networking into the business
• Usually have additional money if you need more funds to continue expansion
• Offer the ability for fast growth for any startup business
Cons of Using Venture Capitalist Funding
• Must be interested in going public or selling your business within five years at most
• Should be prepared to share the control of the business
If you are working to get to the market quickly, the use of a strategic investor may help. These investors receive their name because they come from the industry into which you are entering.
Pros of Using Strategic Investors for Funding
• Quickly enhance your business credibility within your chosen industry
• Money received may come with additional benefits including manufacturing, marketing, and distribution.
Cons of Using Strategic Investors for Funding:
• Can make you recalibrate your whole business in order to serve them
• Dependency on these people may come with risks
• May not allow you to sell to their competitors
The Bottom Line
Deciding which financing option best meets your needs may seem complicated. You may find some options do not meet your needs, or you may not want to assume the risks associated with others. However, if you take your time, do your homework, and think about your specific needs, you can find the perfect amount of money, from the perfect investor, at the perfect time.