If enthusiasm and visions of grand scale success were forms of legal tender funding that great business idea would be easy and efforts to launch it and grow its future would be assured. But an entrepreneur’s great idea and euphoric visions of success, while critical to virtually all businesses success at some juncture, does not go far when tending payment for the costs associated with starting and scaling any new business venture. Before any new product or service meets the consumer’s review, capitalizing the new business is the first sale to be made.
Obtaining financing to launch a new business has never been easy. The financial meltdown of nearly a decade ago fundamentally changed and complicated the process of new business capitalization. Small business financing, once a staple product of commercial banking, has shifted to lenders and investors who are more accepting of the often higher risks associated with emerging businesses. Launching that new venture requires funding sources significant enough to sustain the operations until revenues begin to flow. Determining what source and when it is best deployed in the new businesses life cycle requires due diligence to assure the most favorable impact on the operation. So what are some of the best sources of financing that new business?
Individual bootstrapping or self-financing is usually most commonly used in the very early stage of business creation. Derived from personal savings, equity secured financing or other personal cash reserves, self-funding is often used to finance the costs associated with developing a product or service prototype or the pre-launch expenses that are experienced in establishing a marketable business plan. And while self-funding may be the most advantageous of financing options when it comes to maintaining owner influence over operations, few individual seekers of marketing success have extra buckets of cash just sitting in the corner waiting to satisfy the staggering financial demands of a new start-up.
Angel investors are generally small organizations made up of individual investors who combine their research and resources to provide capital for a business start-up, usually in exchange for convertible debt or ownership equity. “The principal advantage of an angel investor is generally that you have a friendlier atmosphere and a quicker decision-making circumstance for a smaller amount of [money],” said Mark DiSalvo, CEO of private equity fund provider Semaphore. “You are likely to get an investor who has strategic experience, so they can provide tactical benefit to the company they are investing in.” Investments can range from $50,000 to $500,000 or more. Angels are serious investors who often have high expectations and who are looking for solid, timely returns on their investment.
Crowdfunding is a relatively new idea in business financing and is growing in popularity. Crowdfunding is the practice of funding a project or venture by raising money from a large number of people, typically via the internet and is becoming an increasingly popular way for startup businesses and more mature firms to raise money. Online lending services such as OnDeck and Kabbage have become a popular alternative to traditional business loans. While crowdfunding may appear easy, it requires a sound strategy and solid execution to be effective.
The Small Business Administration offers several types of loans for start-ups and is a good source of funding for those with a proven business track record or positive personal credit history. The SBA also offers special business loan programs for military veterans and their spouses. Traditional SBA loans typically take 60 to 90 days for approval and are distributed in amounts of $150,000 or more but the loan process can be challenging to navigate and complete.
Later in the business life-cycle when some measure of operational success is achieved, traditional commercial bank lending and venture capitalists becomes reliable sources for business growth funding. For fast-growth businesses and those with an exit strategy, venture capital can be used to raise the millions of dollars needed to expedite a company’s growth and expansion. Venture capitalists focus on specific industries and can offer advice to the entrepreneur on whether the product or service is going to be viable and suggest ways to expand or bring it to market. Venture capitalists have significant oversight of operations and usually look to recover their investment within a three-to-five-year time window.
With the popularity of the internet on the rise, product presales are becoming a more common way to raise funds for small, product based companies. Selling products before they launch can be an effective source of financing. Priska Diaz, who was able to raise $50,000 for her company Bittylab, says “The biggest challenge was in coordinating the inventory delivery times from our supplier so that we could start fulfilling orders. Another challenge was forecasting the number of units we were going to presell, resulting in a shortage. We’ve now passed the presale stage and sold more than originally anticipated, resulting in back orders.”
Family and friends is a source many budding entrepreneurs consider using to bring their business some needed cash for start-up or expansion. Borrowing from friends and family presents an interesting alternative to traditional forms of financing and can have some advantages. It can however create some challenges on the personal relationship level. Communicating frequently on the progress of the business is essential to preserving the personal relationship.
Regardless of the source, advanced planning and a well understood strategy throughout the businesses life-cycle are essential for gaining and maintaining effective financing and will increase the odds for achieving business success.
Image courtesy of jscreationzs at FreeDigitalPhotos.net