This week I want to revisit an old topic and remake an old video because every new entrepreneur needs to understand the various funding sources available, and the pros and cons of each, but old stuff on the internet gets buried so this topic needed a little refresher. Plus, now there’s an infographic, so what’s not to love?
Anywho, in addition to bootstrapping the business yourself, there are a number of different funding sources available to small businesses and what type of funding is best for you, as well as when you should use each type, depends on your business type and your growth goals. Making sure you use the right type of funding at the right time can drastically impact your success, so let’s take a look at a few of the most common funding sources:
First up are GRANTS from governments, universities, or other non-profit organizations. These can be an amazing source of funding because you get the money you need, you don’t have to pay any of it back, and you don’t have to give up any ownership in your company. You do have to be careful though, because going after grants can suck up a huge amount of your time and money upfront, they can be very difficult to win, and they often severely limit the scope of what you can spend the money on. Often, they simply don’t provide the necessary level of flexibility, so you should be certain you know all of the limitations associated with a particular grant before pursuing or accepting it.
Another option, of course, is getting assistance from FRIENDS & FAMILY. Often, these people are most likely to believe in you and will be more willing to give you favorable terms on an equity investment or loan. However, it can be very dangerous to mix business with your personal life and you wouldn’t want to jeopardize a relationship that’s important to you, so make sure that you take such investments seriously and treat friends and family like you would any other investor – clearly define the risks and terms – including reporting and control expectations – and then stick to the agreement.
Going the more traditional route, entrepreneurs can also seek out LOANS to fund their businesses. A loan leaves you with all of the control and all of the equity you had before you signed on the dotted line (awesome!) but remember that you have to pay that loan back, plus interest, whether or not your company is a success. Make sure you’re in a position to be able to make payments even if everything doesn’t go exactly as planned (because nothing ever does). Also, business loans for companies with only a few owners typically require a personal guarantee. That means that even though you did what you were supposed to and created a separate legal entity and kept your business and personal finances separate, if you default, the bank could come after your personally owned collateral – like your house – to get their money back. You can also turn to a peer-to-peer lending site instead of a bank for your loan and may be able to get some more favorable terms there. However, don’t think that just because the loan doesn’t come from a traditional bank that you’re somehow less on the hook for your debt.
You also have the option of riding the wave of CROWDFUNDING. Crowdfunding has been getting a lot of press lately as the SEC started to clearly define rules to allow for equity investment on crowdfunding sites, but whether you’re using the original rewards system or the new equity system, the concept is the same – you set up a profile to pitch your project to the masses on the internet and have the potential to raise a little bit of money from a lot of people to add up to your funding goal. If you go this route, make sure you realize how much time and energy it typically requires to run a successful crowdfunding campaign and do your research on the different crowdfunding sites so that you use the platform that gives you the best shot at getting funded. And as with anything else, be sure to read the fine print before you agree to anything.
Another great funding option for businesses that want to grow quickly is entrance into business plan or pitch COMPETITIONS. Not only do you have the chance to win cash at these events, but you also get to promote your business, network, and get feedback from entrepreneurs, investors, and peers. There are tons of these competitions every year, so start researching the ones that make most sense for you to enter and begin getting your name out there. Of course, these competitions can be rather time consuming, are often hard to win, and the prize purse can be puny or plentiful depending on what you enter and where you place. Just make sure you know what you’re getting yourself into before you dive whole hog into the competition circuit.
And finally, the supposedly glitziest funding option is raising money from ANGEL INVESTORS or VENTURE CAPITALISTS. Here you’ll give up a chunk of your company to these investors in exchange for their cash – and, if they’re any good, their assistance. This is where you can get big money for massive growth, but this type of investment isn’t for everyone and certainly isn’t for the faint of heart. Firstly, you have to give up control to these guys – they’ll be checking in on what you’re doing, be on your board, and question your decisions because they now own a part of your company too. Additionally, their investment is based on the expectation of a fairly rapid payout – so be prepared to sell – or, if you really rock it, to go public. This isn’t the way to go for someone who wants to pass the business down to the grandkids. Additionally, be careful of the terms of the agreement. These investors are professionals and are looking out for themselves. Make sure you have an experienced lawyer explain all of the ins and outs of the term sheet to you before you sign anything and take the cash. With that said, however, this can be the way to go if you truly believe you can be the next Google with the right amount of cash up front. VCs are career investors working for investment funds and are handling other people’s money for their investments. Angels are individuals putting up their own cash. Either way, they review TONS of proposals, so make sure you make a good first impression when you approach them and know what’s what in your business plan and financial projections before they start asking questions.
Given all of the options out there for outside investment into your company, it’s important that you take some time to decide what your goals are, where your business stands, and what the best funding option for you would be before you pursue something that may not be the best fit. Consider all of the positives and negatives of each option before committing to a deal.
If you’re still totally confused, ask for the advice of a mentor or other expert. One place you can start is my Funding Your Startup Business ecourse.
Also, check out the infographic below to get a quick guide to what’s what when it comes to funding your startup or small business.
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