In our previous article in this series on resources for small business, we focused on how to determine your start-up costs. Once you have a good idea of this figure, it is time to determine where the money will come from. Essentially for a new small business, there are really 3 basic sources of money:
- Self-Funding Your Business: In a perfect world, you would have the money needed to start your business without having to borrow. This is not the case for a lot of folks. The single most important aspect of self-funding is that you own 100 percent of the business, and can do with it as you please. The double-edged sword here is that by owning the entire business, you assume the entire financial risk. If total self-funding is not possible, try to market your idea to friends and family first, if you feel that it is appropriate. The last thing you want to do is not only lose your money, but the money invested by a dear friend or family member. Depending upon the level of financial risk you are willing to take on, you may have the option to tap into your savings via your 401k or similar type of retirement plan. This is another serious decision, as it could affect your ability to retire on time.
- Venture Capital from Investors: The term venture capital (VC) may bring up the connotations of the Shark Tank or high tech Silicon Valley. Venture capital is simply an individual or group that lends you the money you need to get started, in return for a certain portion of ownership of the company, and a solid voice in the ongoing running of the business. The structure of borrowing money is quite simple. There is equity and there is debt. Venture capitalists will be interested in equity in your company, not in giving you a loan (debt). Going back to our financial tenant of risk versus reward, venture capitalists are taking a high risk bet on your start-up, thus demanding a high equity stake in your business. The exact amounts and details will be worked out beforehand. It is highly recommended that you get your attorney and accountant involved in this process. Entrepreneur Magazine provides a list of the top 100 VC firms that are interested in start-ups. You can find them, here.
- Small Business Administration Loans: As we have mentioned, the second way to capitalize your start-up is through loans, or debt. The Small Business Administration (SBA) will probably be the first place that you want to go. You may also have a good relationship with your local banker, who may be willing to loan you money on either a secured, or non-secured basis. The upside to debt financing is that you do not lose stock or control of your business. You are borrowing money at a determined rate that you will pay back over a determined period. A business plan with financial statements should be prepared before meeting with the potential lender. The SBA can act as a guarantor for your loan, thus taking the risk away from the bank. I list of lender matching institutions can be found, here.
With your concept defined and your financing secure, your next step is to prepare for the launch of your business, which will be covered in detail in the next part of this serious on small business resources.