Starting or growing a successful business can be a very arduous exercise when financing is involved. Even with the best of business ideas and products, you need a financial plan. Finding money to launch your business may seem like a major obstacle but there are many small business financing options for you to consider. Here are some options for you to consider that are not in any specific order or preference.
Friends and Family
If Uncle Joe is wealthy (to be defined these days) and has some investing money not working for him he may be a financing source. Only go to friends and family when there is no other option. Those who borrow from F & F can destroy personal relationships forever if the business fails. Carefully draft and explain all the risks in writing if you go this route.
Home Equity Loan
If you have Equity in your home this is one of the easiest ways to obtain financing at low interest rates. Of course today will the decline in real estate values this option is seen less often. There is a huge risk in putting your house on the line however. If the business fails you may face foreclosure. Almost any lender will ask for a personal guarantee and a pledge of assets, including your house on any type of loan they make. Even the SBA will ask. If you provide a personal pledge of assets for a loan be absolutely sure you have a clause allowing you to cure a default and a timeframe you can live with. See a good Attorney for this kind of advice.
Small Business Administration Loan
Under the SBA, there are two types of loans that can help borrowers to get the capital they need to start or grow their business: a 7(a) guarantee small business loan and the 504 fixed asset small business finance program. The7(a) guarantee loans for small business are more common for small businesses and can be applied for at banks participating in the SBA loan process. You will need to be in business two years (post- startup phase) and generating some cash flow to typically qualify for these loans.
Terms on these loans are generally longer and structured for easy monthly payments. However, be careful of the viable rate component on real estate financing. These loans usually Prime Plus loans.
Although this is an option to include for additional financing I do not recommend credit cards for business purposes unless you pay them off each month in full. Plastic money is not inexpensive and used as a means for permanent financing is not recommended. If you are disciplined enough to use credit cards to simply bridge you’re financing needs then it may be a short term viable source. Unfortunately, my experience has shown that business owners retain the credit card debt almost indefinitely. This kind of debt is at the bottom of the food chain in my books.
Ah, yes the Angels! If your business is in an early stage growth phase then these are the guys to talk to. But they are not going to be cheap! They will expect at least 25% return on their money and maybe a piece of your business. Yet, they bring a lot of experience and skill to a business owner for that return. This form of financing is not for everyone. Some Angels will require heavy reporting and involvement in your business. Think carefully before going this route. Financing up to $2 million is common.
If you’re already generating revenues and beyond early stage growth then a venture capital investor may be right for you. VC’s look to recover their investment within a three- to five-year time timeframe. So if you’re not looking to an exit strategy in the next five years this may not be for you. They also look to a business that they can flip easily and get a large return. As your partner they bring tremendous experience to the business and for many owners a necessary prescription.
If your product and technologies etc. are appealing to another investor looking for an add-on or a synergy that increases overall company(s) enterprise value then a Strategic Investor may be another option. This financing can be a group of individuals or another company. Unfortunately, these investors almost always want at least 50% ownership and usually 51% controlling interest.
You have many options for financing as shown. Any one or a combination may work for you. Find a good financial person to help you that has been through this before and get the right advice.