What is Business Funding?
Different Business Funding Options
Business funding comes in all shapes and sizes and your situation and capital needs may not be the same as the next guy's. But, if you have a rough idea on the amount of business funding that you need and the type of investment partner that you'd like to have, you're in good shape. You can use some guidelines as a general rule to match yourself up with one of the primary sources of business funding below:
Friends, family and fools
This is your closest group of contacts and therefore the easiest place to find money for your startup venture. This is a great group to approach if you're looking for ten to twenty thousand dollars or less in startup capital. Many people find it hard to raise much more than this, but it's not incredibly uncommon for an entrepreneur to raise several hundred thousand dollars from family and close friends. This group will be the easiest to persuade for investment and they'll want the least amount of control over the business. However, if the deal goes south, you might have just lost some of your most important relationships in life.
Angel Investors
Angel investors are individuals who invest their own private capital into startups and small businesses. You can find and contact these individuals directly on Go BIG. Angels typically invest $500k or less into a business and are a great resource if you can't or don't want to round up money through your friends and family. Angels will demand and larger share and more control over the business than your friends and family, but there's less risk in losing a close relationship if the business goes under.
Venture Capitalists
Venture capitalists will usually invest anywhere between $500k to several million dollars in a startup or established small business. These folks are serious full-time investors and demand a much larger share and much more control over your business than any other group. However, they'll also rally around you to do as much as possible (provide contacts, etc) to ensure that the business succeeds and they see a handsome return on their investment.
Banks
Many entrepreneurs opt for a personal loan from a bank to help fund their new venture. The downside to this, of course, is that you are liable to repay this loan even if your business fails. This isn't the case with the other groups of investors mentioned above. Alternatively, you can also try for a small business loan, but you'll need a convincing business plan and will often need to prove that you already have paying customers.
Help when finding Funding
We certainly want to see you find your funding for your small business, but let's discuss how we can approach this problem effectively. First off, funding typically comes in a few flavors:
Equity Funding - This is the type of funding where you are exchanging equity in your business for the funding you require. This is very commonplace in a startup company. You will typically give up a percentage of your company (hopefully not much!) so that your investors can own a piece of the action when your company grows like crazy. Although this may seem like something that's "free" to give away, you will find out later on if your company is successful that this is a very expensive piece of collateral to use.
Debt Funding - Debt funding is similar to the way you use a credit card today. Your credit card provider gives you a specific line of credit in exchange for a debt that is owed (plus interest, of course!). The challenge in debt financing is that it usually must be backed up with some sort of hard collateral (like your house, car, or first born child). Most often this type of funding comes in the form of credit cards and home lines of credit.
The Best Bet for Funding
Start with Debt Funding and extend it as far as you can comfortably go before moving into equity funding. Equity funding is difficult to get because it involves so much risk on the part of the investor. Aside from this fact, investors will often want to see some debt funding being inserted into the business before they put their own capital to work. This demonstrates that the entrepreneur believes strongly in the business by putting their own neck on the line.
If you are already past the point of extending your debt funding as far as you can go, then it's time to look into equity funding. When you do look for equity funding, be sure that you can prove to your investors that the equity you are giving up has some tangible future value. Your ability to demonstrate this value will be directly tied to your ability to raise that equity funding in the first place!
There are many options for funding, from bootstrapping to raising a big round of venture capital. Your goal as a startup is going to be to find the proper balance of that provides you the greatest among of operating flexibility while at the same time avoiding any kind of equity dilution in the process.