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Computers are useless.
They can only give you answers.
Pablo Picasso
Artist and Visionary |
Your business funding solution would be
so much easier if all you needed were one answer. But you need lots
of answers. There are lots of questions involved in financing your
business. Let's start with some of the basics.
First, how much do you need?
Really. Bottom line.
I cannot begin to tell you how many
companies write business plans requesting $1 million or $10 million,
without any justification for needing that amount of money at all.
Realistically, you must prove your concept first before anyone will put up
that kind of money.
So, what do you need to get from Point A
to Point B? Do you need some sort of initial
capital for things like inventory, marketing, physical facilities,
incorporation expenses, etc. ? What about personnel? Marketing
studies? Product development?
Question: Where you are now?
Question: Where you want to go?
When exploring your
funding options,
there are several factors to consider:
- Are your needs short-term or long-term?
- How quickly will you be able to pay back the loan or provide return on
their investment?
- Is the money for operating expenses or
for capital expenditures that will become assets, such as equipment or
real estate?
- Do you need all the money now or in
smaller pieces over several months?
- Are you willing to assume all the risk if
your company doesn't succeed, or do you want someone to share the risk?
The answers to these questions will help
you prioritize the many business funding solution options available.
Fundamentally, there are two types of
business financing: Debt Financing and Equity Financing.
Debt Financing
Debt financing is money that you borrow and
agree to pay it back in a particular time frame at a set interest rate.
SBA loans
and other bank loans are typically debt financing, and are a very common
business funding solution.
However, even if your business fails on
Day 1, you still owe the money.
Realistically, too, you will probably
have to personally co-sign any debt that your company incurs, especially
bank loans.
Equity Financing
Another common business funding solution
is equity investment, such as provided by
angel investors and
venture capital. The premise of equity financing is that you sell partial
ownership of your company in exchange for cash. The investors assume all
(or most) of the risk. If the company fails, they lose their money. But if
it succeeds, they typically make much greater return on their investment
than interest rates.
Because investors take on a much higher
risk than lenders, they are typically far more involved in your company.
This can be a mixed blessing. They will likely offer advice and
connections to help grow your business, which can indeed be good if they
know much about your business.
Equity financing means that you and your
investor(s) need to have the same goals in mind. If you want a long
term investment, and your investor is looking to get out in 2-3 years, it
may not work.
This is a very sophisticated type of
investment. Be sure you have good legal advice before looking for
equity capital.
Variations on a Theme
It is far more common that one solution
doesn't work. A combination of debt and equity is typically far more
practical, and is a more accessible business funding solution. We
explore dozens of financing options on the web site. Here are but a
few of them:
Friends and family are often your best
source for both loans and equity deals, especially for smaller companies. One caveat:
structure the deal with the same legal rigor you would with anyone else or
it may create problems down the road when you look for additional
financing. Prepare a business plan and formal documents--you'll both feel
better, and it's good practice for later.
Credit cards are a useful tool for cash
flow management, assuming you use them just for that and not for long-term
financing. Keep one or two cards with zero balance and pay off the balance
every month. This will give you about a 30 day float. Be
careful, though. Many credit cards now charge interest from the date
you use the card, NOT from the date they bill you. Managed well, credit
cards can be effective; managed poorly,
they're extremely expensive.
Bank loans come in all shapes and sizes,
from microloans of a few hundred dollars, to million dollar loans by major national banks.
The bigger the loan, the more important is the backing by assets.
For smaller companies, your home equity may be used as collateral, or even
your IRA. If you obtain a line of credit rather than a fixed-amount loan,
you don't start paying interest until you actually spend the money.
Leasing is the way to go if you need
big-ticket items such as equipment, vehicles, or even computers. Your
supplier will help you explore this.
The common denominator in all of these is
that "the further you can go on your own, the better off you are."
Explore all
bootstrapping options first. Take the company to the limit of
your ability.
There are many channels available to you
to raise capital. All of the above approaches have numerous variations.
Put together a solid business plan, talk to a financial adviser, and just
start asking. Someone will eventually say "Yes".
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