Financing a business is never easy; it’s a careful dance between risk mitigation and investor/lender motivation. In the current global economic climate, it looks like raising money is going to be harder than ever before. If you are looking to finance your business, there are several different ways of finding the money that your business requires, here are 5 different fundamental tools in business financing that you should explore.
An angel is a high-net-worth individual, and if you’re looking to get a business off the ground, these are the investors that you will need to think about, as at an early stage you will be looking for seed funding and big investment companies (Venture Capitalists or VCs) only get involved for large amounts of cash. You can find angel investors by contacting an angel group – these are large communities of angel investors who get sent various investment opportunities. If any angels are interested, you will then need to pitch to them. When pitching, be clear, succinct, and have a clear strategy for the investors to exit their investment. If you don’t have demonstrable experience in your field, you should add some people who do to your management team and your board of investors. This will help to ease fears about your ability. You also need an in-depth understanding of the market and should be able to demonstrate that you are an expert. If you feel uncertain about this, it might not be time for you to receive investment yet. Lastly, it should be obvious that you are genuinely passionate about your endeavor and not trying to cash in on some market trends.
The world of loans is complicated. If your business doesn’t take many risks (e.g. it is a critical small business that clearly performs well, and your community is missing one), you might want to apply for a loan from the bank. Lending has become a lot stricter after the 2008 crash, but there are some funds available for small businesses. You will want to demonstrate the lack of risk compared to other small businesses like flashy startups. If the bank turns you down, you might want to look into loans from the Small Businesses Administration of America, who have funds to support special breaks on fees and to guarantee loans for small businesses. These are open to any small business, but you need to be able to demonstrate that you can’t get the money through more traditional means (basically you need to show that a bank has turned you down). You also need to meet the criteria that the government defines a small business in your industry needs to meet. If you get approved by the SBA, you will then need to apply for a loan from a financial company as the SBA doesn’t provide the loans directly. Many fail at the last hurdle as criteria become stricter. Companies like biz2credit are often preferred to banks, and if they deem that you are not an appropriate candidate for an SBA loan, they have several other business financing options for you to explore. Countless other financing options are available to businesses, including merchant cash advances, unsecured business loans (prepare for higher interest), business acquisition loans, and equipment financing. It all depends on the exact nature of your loan, the amount you need, the interest you can afford, the period of the loan, and when you require funding.
Family and Friends
Some people consider obtaining a loan or investment from family and friends as ‘not proper financing’, but this is absolutely incorrect. Many successful businesses start by asking friends and family to send some spare cash your way, but you need to make sure that there is a clear understanding between parties. Treat them like angel investors, pitch to them, and be clear about your strategy in the up and coming months, show them what you will do with that money and why you think it will lead to more money being made. A mistake that many people make is to allow family and friends to invest based solely on trust – this can destroy relationships. A family and friends’ investment should be one where all parties are active and informed, so if something goes wrong, they can take equal responsibility for it.
Crowdfunding is a fun way of raising money and more suitable for B2C models where you as a company can interact with your investors who are investing because they would get some value from your business achieving its goals. The best thing about crowdfunding is that you don’t give away any equity; instead, funders are rewarded through your business, providing products or perks. Crowdfunding shouldn’t be thought of as long-term financing, but it can be a great way to bring a specific idea to fruition, like if your company needs money to create a specific product.
Sometimes you won’t have the credit history or potential collateral to secure a loan from the bank, but sometimes the amount you’re asking for will be so low that the bank just isn’t interested. Microloans are the solution! Microlenders are non-profit organizations that offer small loans to help a small company achieve a specific goal. They normally charge higher interest rates than banks as there is more risk for them, but they are an excellent option for startup entrepreneurs or a company with poor cash flow which needs to make an investment to secure a contract or buy some new equipment. Microloans are also prevalent in the Third World, where they are used to finance small businesses that can help to bring people out of poverty. Because of this, microloans tend to have a good reputation, but don’t go into a microloan expecting free money; the underwriting process is often more flexible, and the documentation required is typically less extensive than banks, but they are still loaning you money, and you will still be legally indebted to them.