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The How-To of Business Funding (Part Two)

Posted by Catherine Yushina on Jul 10, 2017 9:00:00 AM

Part Two. Different Sources of Capital.

Starting and growing a business requires capital - what if you are a small business and investors are not chasing you yet? Here are some sources that successful entrepreneurs use when fundraising for their companies.

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Self-funding - most entrepreneurs get initial funding for their businesses using savings accounts and zero interest credit cards to leveraging other personal assets. If you believe in your vision, you should feel comfortable investing you own money into the business. In turn, this will make potential investors more comfortable knowing you have skin in the game.

Bootstrapping - your business funds itself. Depending on the business model, you might be generating enough cash that enables further growth. Never sell part of your company, unless it is necessary to move things forward.

3F’s (friends, family and fools) - Those closest to you are more likely than anyone to believe not only in your vision, but your ability to make that vision a reality. Friends and family can provide either equity or debt funding and might be more flexible on the repayment. A thing to keep in mind is that the loss of capital can cause hurt feelings, so you might be risking personal relationships if the business fails. To avoid friends and family feeling like “fools” you might want to structure this type of funding as a high interest loan for a specific period of time. And make sure to borrow just enough to launch the business into operations to be able to go after big money. 

Crowdfunding - is a great tool to fundraise for a business. There are enough platforms out there to find a mechanism that is best for you. Sometimes you only need an idea or project that will appeal to thousands of potential funders through various platforms. Investments can be debt, equity or rewards-based.

Small business loans - there are many organizations who are interested in lending to small businesses. Most lenders will want the loan to be secured by assets of some type, see your credit score and rates may be high - so pay attention and do the math: there are a lot of loan calculators out there to help you. 

SBA loans – the Small Business Administration has many programs that can help get some funds, but in general, these loans require a guarantee that the loan will be repaid, to enable businesses to get loans from traditional lenders.

Banks – traditionally banks make small business loans. But after the 2008 crush, the conditions are harder: they typically require a track record, will often want the loans secured with assets, many require the business to be profitable and the rates might be high.

Economic Development Programs - not everybody pays attention to this funding path but don’t forget to check with your state, county and municipal economic development offices - they have an interest in helping businesses succeed to boost local and regional economies. Depending on your location and the type of business, these agencies might offer financial resources, including loans and grants.

Partners - another funding approach that gets overlooked is finding a partner that could become a source of funding. Strategic partners can benefit from supporting the business and therefore would be willing to align resources.

Hedge funds, endowment funds, and family offices - in the past few years, these types of large investment pools have been looking for ways to diversify their portfolio. One of the paths is funding small businesses. These lenders often are willing to make longer-term loans and might be interested in impactful businesses.

Angel investors - these people might believe in you and your business and be willing to invest. The increasing number of angels are successful entrepreneurs. Today they are forming investment groups to spread risk and to pool research. Something to keep in mind is lending you money to start a business doesn’t make angels the right financial partner for the long run. 

Venture capital - these firms provide business funding on different stages and might focus on specific industries so do your homework. They are typically looking to make relatively large investments and take a significant share of the company. On the upside, VC do follow up investments and some provide support and resources as well as a validation (in case a big VC firm invests in your company).

There are plenty of ways to fund a business - the list doesn’t end at the names 12 - so go and find the best way to fund your business and make it a success!


Part Three would be about Pitching to Investors.

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Topics: Business Funding