Apply the Goldilocks principle when you consider financing options for your start-up.
If you’ve started a small business [3], you know that funding is crucial. There are several financing options available, but pursuing the wrong kind can lead to problems like fights between you and your financiers or control of your business being taken away from you. To save yourself time and aggravation, remember the valuable lesson learned by Goldilocks – look for the option that’s “just right”. Here are some financing plans that might be your perfect fit:
Debt Financing: Banks can provide you with a loan or line of credit that comes with a repayment schedule and an interest rate. In order to secure this, the bank will examine your company’s cash flow, collateral and the liquidity of your assets. To qualify, you’ll need a sensible business plan, as well as a thorough understanding of your financial situation. One way to maximize your chances is to establish a relationship with your banker before requesting a loan.
Advantages:
• Don’t have to give up equity
• Available to companies that don’t qualify for equity funding
Disadvantages:
• Must pay interest
• May require personal collateral such as home
Grants: There are several state, regional and minority grant opportunities available. For example, the Small Business Administration created Small Business Innovation Research grants to encourage small businesses to explore their technological potential. To know more, visit www.sba.gov/sbir/ [4]. To research the various grants given by the federal government, check out www.fedgrants.gov [5].
Advantages:
• Free money
• Investors love the “leverage” that grants provide
Disadvantages:
• Highly competitive
• How you use the funds is strictly defined
Angel Investors: There are approximately 250,000 high net-worth private investors in the U.S. who fund over 30,000 small companies each year. These investors are usually friendly and patient about their investments, and share their business wisdom and valuable relationships along with their money. They often like to invest in groups, each taking a piece of the deal. To find leads on angel investors, visit www.vfinance.com [6], a business finance portal that also has information on venture capital sources. Another valuable place to search is www.gaebler.com/angel-investor-networks.htm [7].
Advantages:
• They invest business acumen and networking opportunities, as well as money
• Relatively patient about their investments
Disadvantages:
• They are often difficult to find
• Managing the divergent interests of a large group of angels can be tricky
Choose Wisely
No one said being an entrepreneur [8]was easy! Like Goldilocks, you’ll eventually have to choose. Beware of financing options that are too complicated or too risky, as well as those that offer too little or too much. Do your research and then ask for the right amount from the right source at the right time. You’ll secure the financing that works the best for your startup and be well on your way to success.
What funding options have you followed in starting a business? Do you have any advice to share? Please enter your comments in the field below.