That concept that’s been eating away at your brain for years is finally starting to see light, and it’s time to make your startup happen. There are many options for funding startups, but finding and securing the cash takes careful research, great negotiating skills, and, above all, an untiring commitment to launching your new business.
It is imperative to first start your funding search with a good business plan that shows investors and lenders your company’s potential. You also want to be sure to get the right people onboard. The wrong investors can suck up an amazing amount of your time, and force you to divert resources away from building your business—as well as potentially steer your company in a different direction than you had initially envisioned.
But as many savvy Gen Y entrepreneurs know, there are many ways to skin a cat. With unemployment rates continuously hovering at a high mark, many self-starters are turning to the startup dream they’ve had for many years, and thankfully there are now many options available for funding these dreams. However, no matter whose help you seek for financing, it is essential to have a solid business plan—even (particularly) when approaching friends and family.
When borrowing money, there’s a few key issues to keep in mind, especially since these questions will have major implications for both your business and your personal relationships:
- The rate of interest you’ll pay.
- Are you willing to give up equity? Or would you rather pay interest on a loan? (Commercial lenders are far more likely to require this than are family members and other personal lenders).
- How will you structure the arrangement when borrowing from family or friends?
- Will your business be a Sole Proprietorship, or will you expand control to a form ofPartnership, Corporation, S Corporation, or Limited Liability Company (LLC)?
Start with Blood Money
For many young entrepreneurs, the best investor group to approach first is friends and family, or “blood investors.” But a common mistake is hitting up friends and family too early, especially when a formal business plan is not in place. No matter how excited you are about your idea, you need to be presenting the same game plan as you would be presenting to a banker or angel investor. That includes supplying formal financial projections, as well as an evidence-based assessment of when your loved ones will see their money again. This approach will reduce the likelihood of unpleasant surprises, and lets your blood investors know that you think of their funds as something more than just play money.
Keep your investors in the loop by providing them with continous communications, and a plan that will keep them satisfied as your business grows:
- Send your related investors letters acknowledging their investments, and thanking them for their support.
- Offer to pay out an attractive interest, for example, 1% a month on a $10,000 investment, which equals his/her incremental borrowing cost.
- Include a clause that allows investors to get their money back at any time, including communicating that they just need to let you know, and that you will pay them instantly.
- Sign a promissory note whether you borrow money from a bank or someone you know—a legally binding contract in which you promise to repay the money. Most promissory notes say, in effect, ” I promise to pay you $_____, plus interest of ___%” and then describe how and when you’re to make payments.
Traditional Forms of Small Biz Financing
For many entrepreneurs, the U.S. Small Business Association (SBA) is an excellent source for funding, and crucial information for new startups.SBA loans are for smaller sums than most banks are willing to lend. Banks participate in the SBA program as regular, certified or preferred lenders. The SBA can help you prepare your loan package, which you then submit to banks. If the bank approves you, it submits your loan package to the SBA. Applications submitted by regular lenders are reviewed by the SBA in an average of two weeks, certified lender applications are reviewed in three days, and approval through preferred lenders is even faster.
The federal government has a vested interest in encouraging the growth of small business. As a result, someSBA loans have less stringent requirements for owner’s equity and collateral, than do commercial loans, making the SBA anexcellent financing source for startups.
Community banks offer the best (and sometimes the only) chance for many small or young companies to start building a banking relationship. Small banks may have fewer products than the big bank boys do, but flexibility is their major advantage to entrepreneurs.
Microloans, which typically range in size from hundreds of dollars to the low six figures, make perfect sense for startups. These funds may be used for working capital, inventory, supplies, furniture, fixtures, machinery and equipment, and should be considered as an early-stage option if asmall infusion of capital could make a difference to your start up’s cash flow or growth-related activities. The SBA developed a Microloan Program in 1992 to increase the availability of very small loans to small business borrowers.
Find Your Angel
Angel investors are estimated to provide up to 90 percent of all seed and startup capital. The venture capital community, in comparison, invests less than 2 percent in startups, and focuses on a smaller pool of later-stage companies instead. The SBA estimates there are at least 250,000 angels active in the country, funding about 30,000 small companies and investing $20 billion to $50 billion a year.
Angel networks make for some of the best matchmaking between entrepreneurs and investors, especially when startups have a hard time finding investors through the traditional route of word of mouth. Each angel network operates slightly differently. Some are free while others charge for consideration of an application or require a pay to pitch fee. An entrepreneur may shell out $50 or $5,000 for a 15-20 minute presentation before investors.
Locating Your Investor
Being just as savvy as the young startups they invest in, many angel investors can now be found online. The Go Big Network is a online network with a community of 20,000-plus investors and 250,000 startup companies. Entrepreneurs can post and search profiles for free, but there is a one-time annual fee to advertise a funding request to investors or contact investors directly in the database.
A free online network is Go4Funding , which pools together entrepreneurs and prospective investors from around the globe. Business owners can post their capital requirements, while investors can post their profiles.
But in order to get investors to open up their checkbooks, they need to be convinced that your idea is worthy, and that you’re willing to be subjected to increased scrutiny and give up a percentage of your company. Young entrepreneurs also need to figure out what a potential backer looks for in an up-and-coming company.
An investor will often evaluate a company’s potential along four key criteria:
- Does the company’s product or service address a large and growing market need?
- Can the company scale quickly enough to take advantage of that market opportunity?
- Does the company have a defensible competitive advantage?
- Can the management team execute on the potential outlined in the first three criteria?
Resources for Small Businesses
America was built on capitalism, allowing everyone and anyone the opportunity to pursue their dreams. Thankfully there are many resources for bright-eyed startups to seek advice as they work their way through the tough times of getting a new business started.
SCORE is a nonprofit association dedicated to helping small businesses start, grow and succeed nationwide.SCORE.org has 350 chapters throughout the U.S, with over 13,000 volunteers nationwide including working and retired executives, and business owners who donate time and expertise as business counselors. Other helpful sites for entrepreneurs include Biznik.com, entrepreneur.com , and inc.com . We even hold our own at iGrad with our entrepreneurship section , including our ongoing “Enterprising Entrepreneurs” series that focuses on successful 20 something entrepreneurs.
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