How Can You Fund Your Business?

We are frequently asked this question by clients and it deserves a considered response. Each situation is different not only in size but also in type, purpose, and funding needs. Here we will explore the most common ways of funding a business and/or its growth.

Self Funding (Pay as you go)

This type of business is usually a small sole proprietorship or possibly some type of partnership. Money from savings or current salaries is used to pay for each business need. This method avoids debt but it can make the process of actually getting the business off the ground take longer. It is not recommended that you borrow from or against a 401k or IRA for this purpose.

Credit Cards

This is an extremely risky method of funding a business. With interest rates rising to unprecedented highs (there is a new credit card with an interest rate of 79.9%) and the lowering of limits, using credit cards becomes even more problematic.

Family and Friends

Many people start their business with help from family and friends. However, to avoid or at least mitigate a very common problem of misunderstandings, sign a promissary note or more formal loan agreement. This keeps the loans on a business basis and has less potential for damaging personal relationships.

Personal and Business Loans

Depending on your credit score and other factors, you may be able to take out a personal loan from your bank or credit union to fund your business. Although credit is tight at the moment, many local banks were not hurt by the financial meltdown of large banks. They did not have the money to play the high risk games of big banks or simply chose to stick to conservative banking practices. In addition there is a new government plan to help out small banks now so that they will be able to lend more. If you are taking out a business rather than personal loan for your business be advised that not only will you likely need a business plan but that you will most likely be required to sign a personal guarantee. What that means is that if your business were to file for bankruptcy at some point, you will still be personally liable for the remainder of the loan.

SBA

Many people mistakenly believe that the SBA makes loans. It does not. The SBA guarantees a percentage of the loan amount through their approved lenders. The SBA has a very wide variety of programs for special groups such as veterans, minority and women, native groups, and many more. The qualifications for each group are strict and may limit the type of funding permitted and the circumstances. There is a new program for auto, RV, boat and other types of vehicles. The amount of permittable lending also varies from program to program. The federal government is now starting to focus on small business issues and will be pouring more money into SBA programs and designing new opportunities for lending. The SBA requires a business plan to be considered for any of its programs

Grants

Contrary to the ads on TV, there are not grants to start any business you want. The majority of grants are for very specific purposes and fall primarily in the healthcare, education, and criminal justice speres. Should you actually find an appropriate grant opportunity be aware that there is a deadline for application, you will be competing with hundreds and perhaps thousands of others after the same grant, and there are always very strict rules regarding usage of funds and reporting that must be met.

Local, County and State

Although not usually funding dollars per se, local, county and state economic development groups may be able to offer such things as tax abatements and other incentives to businesses. Each group has different qualifications such as industry, number of potential employees within a specified period of time, location of the business, etc. Some states even have funds for grants to companies in various stages of development and/or in certain industries. Check your state website for futher information. In all likelihood, you will be required to have a business plan.

Investment Banks, Venture Capital Firms, and Angel Investors

When you need large amounts of funding over a long term such as pharmaceutical or software development, companies turn to investment bands and venture capital firms. Some will fund start-up companies and others will only fund later stage development. The main difference between this type of funding and all others is that investment banks and venture capital firms will require part ownership of the business; in some cases, over 50% of it. Since you will be giving up partial ownership of the business, be certain that you work with a bank or firm that has experience in your industry. Some VC (Venture Capital) firms operate incubators for start-up companies. They often provide a location, support in all areas of management and marketing, and with expert advise help you really grow your company. They are worth taking a look at. You can sometimes find these incubator type opportunities through some universities and economic development groups. To apply for funding from any of these groups you must have a really great business plan.

Angel Investors are few and far between and shun publicity. They invest their own money and can provide guidance if they choose to do so. Sometimes they want part of the business and sometimes they don't. If you should happen to find one, consider yourself extremely lucky. In most cases, an angel investor will want a very good business plan.

There is an excellent website that not only can help educate you on capital funding but give you information by state on funding sources. Visit http://activecapital.org/nation

Disclaimer

Although we write very professional business plans suitable for requesting funding up to $100 million, we cannot guarantee that you will receive funding from any source or for any amount.