Funding is on the minds of every entrepreneur.  Financing options for starting a business are all around, but pursuing the wrong type of funding for your business can lead to undesirable outcomes, disputes between you and your financial partners, or a waste of time.

To help you, we have highlighted various options that might fit your business.

Debt Financing

The majority of new small businesses are funded with some type of debt financing via financial institutions. If you are credit-worthy, banks can provide you with a loan or line of credit.  They will look carefully at your cash flow, collateral and the liquidity of your assets. Your business must have a well written business plan, and you must know your business and market very well.  One way to increase your chances of success is to establish a relationship with your banker before you make the loan request.

This option provides money without having to give up equity.  Loans are also generally available to businesses that can’t get equity funding.  But the price you pay is interest, and depending on your situation the interest rates can be quite high.  You will also be forced to put up some collateral like your house in some situations.

To search for a loan, check out this site.  They allow a search based on your situation and have over 4,000 sources searchable.  Also, check out the SBA programs available, if you cannot get financing from a bank, the SBA may have a program that you can qualify for.  Also, as a possible last resort, you can always get a credit card to begin your business or provide some funding at a critical moment.  Just make sure that you do not spend more than you can pay back in a short time.   Enough said.

Grants

If you are in high technology, consider securing a grant through the Small Business Administration’s Small Business Innovation Research (SBIR) Program.  There are also numerous state, regional and minority grant opportunities available.  By working together with a government agency in a Cooperative Research and Development Agreement (CRADA), you can also optimize resources and cost-effectively perform research (thus requiring less funding). These programs are designed to help fuel the innovative fires at small businesses.  Billions of dollars of “free money” should not be overlooked.  Here are links to the USDA program, the NGA (military) program, the USGS program, and an example of an agreement between ICANN and the Department of Commerce.  Search for other programs within your niche–there are many available!

The upside of grants is that the money is free!  The downsides are that most grant programs are really very competitive and you are limited (strictly) in how you use the funds.

Equity Financing

While debt funding is by far the most common way to fund a business, there are still thousands of businesses financed each year by private or institutional investors in exchange for an equity ownership stake.  These financiers range from the less sophisticated “friends and family” type situations, to private investors known as “Angel Investors,”  and on up to the sophisticated investors called venture capitalists.

Family Financing

When you cant get debt financing (or before you even seek it out), consider asking your better off relatives for help.  Family funding typically is smaller sums without a lot of hassle or legal expense, but be wary. You must always be professional and communicate as honestly and frequently as you can.  Email updates are great for keeping Uncle Richie enthusiastic about his investment in your busines!  Also, depending upon your priorities, realize that business has risks, and you may jeopardize your relationships with friends and family if your business opportunity goes South.

The best part of family or friends investing is the convenience, lack of paperwork and the fact that you might be able to obtain the funds quickly.  The downers are that his source is likely limited and that you are risking the relationships.

Angel Investors

There are approximately a quarter million high net-worth private investors in the US who fund over 30,000 small companies each year.  Angels have earned their name by typically being friendly and patient about their investments and by providing their expertise and valuable networks with their monetary investment. They often invest in groups, with each taking a piece of the deal.

These individuals typically have more than money:  they invest their time, expertise and provide excellent networking opportunities. They are also more patient about their investments than most VCs (or even family members).  The only downside if the difficulty you will have finding them, and the potential difficulty of dealing with several of them at once, if you are dealing with a group.

Venture Capitalists

If you have good initial revenues, quality management in place, and a cgoal to eventually sell the business or go public, you could be ready to approach venture capitalists (VCs).  But because they got fleeced in the dot-com and bio-tech bubbles, VCs have higher standards now than they did in 1996.  Still, they remain serious players in the investing world, and remain the biggest fish in the investment sea.  Keep in mind that VCs look to get their money and profits out as quickly as possible. They are a great source if you have (or plan to have) meteoric growth and will likely require additionals financing in the future to maximize your potential.

VCs typically have the same benefits as Angel Investors and generally have more money available.  However, speed and growth are essential to attract these big players.  Also, you must be prepared to share control.

Strategic Investors

Strategic Investors usually come from within the industry you are entering and find your products to be complementary to their business objectives or products.  A well placed partner can overload your business with opportunities.  However, they may also seduce you into reallocating your company’s resources in a way that favors their interests and not yours, restrict you from dealing with their competitors as your customers, and/or even cancel their business relationship with you at the worst possible moment.  Be sure you know what you are getting yourself into, and for the love of God, make sure you have a solid contract that prevents them from taking advantage of you completely.

These investors can give you instant credibility in your targeted industry, and often get you a fantastic list of contacts for all aspects of your business.  Just be careful that your interests are being served as well as your investors.

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