Obtaining financing for your new business will undoubtedly be one of the most frustrating things you will ever have to do. While all you see is unlimited potential for your business, all others seem to see is risk. In fact, 9 out of 10 business ideas never even see the light of day because of lack of funding.
This article discusses some of the common ways that small businesses can raise money. The method you use to raise money will depend on your own personal situation, the type of business you are starting, and the business/personal network you have.
Entrepreneurs spend an average of $70,000 to start a business, and most of that money is provided by the small-business owners themselves. Bootstrapping means using whatever resources you have on hand to help you get your business to the next level. Where do entrepreneurs find the money? While a large part comes from personal savings and home-equity loans, they also tend to use plastic heavily. In fact, perhaps half of all startups are funded by the owners’ credit cards.
Take Google. For the first two years, founders Larry Page and Sergey Brin financed their efforts almost entirely through the use of credit cards.
But tread carefully. If you rack up a huge debt and damage your credit rating, it’ll be hard to get further funding.
2. Friends and family
At the very early stages of any startup, entrepreneurs also tend to raise money from relatives, colleagues and other people they know well.
Usually, friends-and-family financing is informal. You probably won’t have to write a business plan beforehand, for example. But no matter how well you know your early investors, you’d be wise to draw up a contract to prevent any misunderstandings down the line.
For most startups, getting a traditional bank loan is a long shot. That’s because banks typically will only consider companies that have been in business for two years. What’s more, they need to see a tangible asset that can be used as collateral. The exception is a manufacturing company building or using heavy equipment.
One possibility is to apply for a loan guaranteed by the Small Business Administration (SBA). A bank is more likely to take on a company with an SBA guaranty. Even with that seal of approval, however, you may still have to pledge your home as collateral.
If yours is a technology business, you might be able to apply for a Small Business Innovation Research grant (SBIR). That’s a federally funded program mandating that certain agencies set aside part of their budgets to fund fledgling high-tech companies with interesting inventions they want to commercialize.
There also are a limited number of government grants for women and minority-owned businesses. The really good part: Competition for this money is steep. So, if you apply for and win a grant, it’s helpful for attracting funding from other investors.
If you’re further along in your development – you have a management team and, preferably, a product or service on the market – you can try angels. They’re private, high net-worth individuals who generally invest anywhere from $50,000 to $2 million in companies. Angels invested about $25.6 billion last year, an increase of 10.8 percent from 2005. Often former entrepreneurs themselves, angels can offer a lot more than money: They also can provide expertise and useful contacts.
How to find them? One avenue is to approach the growing number of angel clubs that have sprouted up. These groups of private investors meet regularly to hear brief presentations from entrepreneurs seeking money and then, often, give money jointly to companies. The downside: As angels have become more sophisticated, they’ve also started to focus more on later-stage companies.
6. Venture capital
Simply put, Venture Capitals rarely invest in startups or even early-stage companies. Consider the numbers: In the first quarter of 2007, VCs invested just $26 million in seed funding, according to Ernst & Young and Dow Jones VentureOne, compared with $3.1 billion for later-stage ventures.
Still, if your company already has a track record and promises high returns, it’s worth a shot. Your best bet is to use your network to find a referral. Then, make sure you have an airtight business plan. You also have to be willing to give up control over major decisions and to sell your business or have an IPO within seven years of receiving an investment.
7. Customers and suppliers
Some customers may be willing to help fund your product development if you customize it for them. As for suppliers, you may be able to convince one to hold inventory for you, as long as you guarantee them you’ll pay for the material by a certain date. Remember: When you’re raising money for your business, it pays to be creative.
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