So you want to start a small company, but you need to know how to get funding for a start-up business. Here are a few options:
Most new small businesses rely on debt financing from a financial institutions. Debt financing entails banks providing a loan or line of credit that comes with a repayment schedule and an interest rate. Key to securing this type of loan is your company’s cash flow, collateral and the liquidity of assets.
The good: You don’t have to give up equity.
The bad: You’ll end up paying interest and you may have to offer personal collateral such as a home.
If you’re willing to give up part of your equity in the company, there are plenty of institutional investors who invest in small companies in exchange for an equity stake.
The good: Quick access to funds and this method has the fewest contractual strings attached.
The bad: It’s a limited one-time source of funding, and you have to give up some equity.
Venture capitalists are really interested in future start-ups. They want initial revenues coming in, a quality management team in place. They also want to know that they can eventually sell the business or go public in an IPO. Venture Capitalists are mainly interested in quick growth.
The good: They typically have more money if you need more to grow.
The bad: You’ll need to be interested in selling the business or going public, and you need to be prepared to share control of your company.
If you’re in a specific industry you may be able to get funding from equity financiers from within your industry. These investors consider your product strategic for their own businesses. Keep in mind you’re partnering with a potential competitor. Be sure you know what you’re doing.
The good: There are added benefits such as manufacturing and distribution infrastructure.
The bad: They can force you into changing your entire business to better serve their own needs.
Federal and state government grants are available for many specialized businesses, such as child care or even technology. There are also numerous state, regional and minority grant opportunities available. These programs are designed to help fuel the innovative fires at small businesses.
The good: Lots of financial leverage, which can help attract investors.
The bad: They are funded by tax dollars and are subject to very stringent compliance and reporting measures.
Research and Innovation Grants
If your business is involved in scientific or technology research you can consider securing a grant through the Small Business Administration’s Small Business Innovation Research (SBIR) or Small Business Technology Transfer Programs (STTR). To qualify, you must meet federal research and development objectives and have a high potential for commercialization.
The good: It’s free money!
The bad: Your use of the funds is strictly defined.
If you find one, you’re in great shape. But like a real angel, they’re not that easy to find. These individuals are usually patient about their investments and offer wisdom. You’ll be their pet project—or at least one of them. They often like to invest in groups and divvy up the investment.
The good: They will be patient with you.
The bad: They don’t appear all that often.