Paying for a small business startup requires plenty of planning and researching. Here’s a list of five ways to fund your SMB (Small and Medium-sized Business), as well as what each option may entail for you as an owner.
This means taking all of your savings, bonds, and assets and using them as collateral to for purchasing power. If you need a loan, the smartest way will be to go through your bank, as you already have a history of working with them.
No matter the institution that you decide to go through, however, you will need to provide a detailed business plan as to how much money you plan to make, how much you will need at the very least to make it work, and how you plan on being able to pay it back when you finally get everything going.
In the case of self-financing, all of the burden of running your empire will fall on your shoulders. Financing a loan off of your own credit as well as your own name can help you keep ownership of your start-up business, but as with most high-profile purchases the deal is buyer beware.
If you lose money, you will be losing it straight from your pocket, and if you need to declare bankruptcy, default on purchases, or even run into lawsuits, you will be the one to be charged. Personal loans for business purposes can also harder to be approved for, since anyone without upper echelon-types of credit scores will come under heavy scrutiny by lenders and banks for everything from your personal health to how your business plan is written.
Finding investors may force you to share your creative ideas, as well as your business titles, but in the long run it can help to protect your own personal finances as well.
Remember, your collateral will end up being everything under your name, from your savings and checking accounts to your home equity, so be prepared to make the sacrifices that come with running a brand new business.
2. Angel Investors
Any investor in money only is an angel investor, so if you can find someone to back you with capital, you should make sure the partnership is at least in everyone’s favor.
Your power as a part-owner will involve everything from opening the business to keeping it in gear.
Your investors will be waiting on returns of their own, so beware of how trustworthy and how involved they really are in the direction of your company, because if they pull out before you’re ready you may have to shut down at least temporarily.
On the other hand, make sure you’re not working with an investor with plans to buy you out if your business does take off.
3. Venture Capitalists
If your business has achieved at least a year or so of success, then you options for funding will increase dramatically. Venture capitalists are businesses that specialize in moving small businesses forward with the hopes of high dividends in the future.
Generally speaking, your business will need to be achieving relatively high levels of success and be in the position to continue doing so in order to interest VCs, since your potential to either sell for profit in the near future (3-5 years) or go public will influence them greatly.
Usually, VCs are groups of wealthy investors who are looking for profitable SMBs to take under their wing.
Beware, though, that if you involve them you are willing to relinquish some of the control of your operations. With the amount of money that venture capitalist groups are willing to invest in companies, they are more than expecting higher profits. Their requirements for your business will be higher than usual, as they specialize in picking businesses through tried and tested formulas that generate a proven history of profit.
4. Your Government
With the economy still slumping in certain industries, your local and national government will likely be offering grants and loans for anyone looking to build and create jobs. If you qualify, you may be entitled to a good amount of funding that you may not have to pay back. Even in cases of default or deferment, your working tax dollars may end up offering you a safety net.
Small business and development groups like the Small Business Administration exist for companies like yours, as long as you fit their criteria, which can be extremely strict. Remember that you won’t be the only company looking for government handouts, so only the highly competitive need apply (think college scholarships). Also, with government lending there tends to be guidelines as to how you use your money, so check with your local offices on your specific industry before applying.
5. Invoice Factoring and Merchant Cash Advances
Again, this can only help established business with rolling incomes. If you need financial help for only parts of the year, you can also go through your credit card processing merchants to look for fee-based cash advances. There are also companies willing to collect from your past-due invoices or contracted payments from as-of-yet unfinished projects.
Fees and regulations will differ from company to company, so take the time to research your local agents before committing.
Loopholes, market-specific laws, and even contractual agreements can be used against you by your partners just like they can help to protect you from the other side. If you can afford it, always try to employ a lawyer or a financial advisor with knowledge of your industry before you being your talks with any funding source.
See: How to Writing a ‘Traditional’ Business Plan. This outline is geared toward a more traditional manufacturing and distribution type company and presumes you will prepare a 25 page document.