Depending on the type of start-up you have, there is a financing model to optimally fund your business. If you are running a home-based business then you can use your savings and credit card loans. If your ambitions and ideas are larger than normal, then you may consider other ways of funding your business. Remember to select your financial options carefully or else it can lead to conflicts between you and your financiers which could then lead to a possible shift in control of your business. We have put together a few ways to get business angel funds.
- Approach banks for debt financing – According to a survey conducted by the Federal Reserve, 26% of banks experienced a demand for commercial and industrial loans from small businesses during the fourth quarter of last year. Many small businesses are approaching their local banks and other financial institutions for debt financing. In debt financing, if you have good credit, then banks will provide you the credit you want, but you have to repay the amount in a stipulated time period with interest. “In addition to showing a successful track record in managing their business, we also consider the customer’s existing account relationship with the bank as one of many factors in making lending decisions – and this can also include their personal banking experience with us,” said Brad Baumann, Vice President at Washington Mutual.
- Equity Financing – In this form of funding, private institutions or individuals are willing to fund your venture in exchange for an equity ownership stake. They include angel investors, venture capitalists and friends or family. Let’s take a look at each one of them.
- 1. Venture Capitalists – If your venture is in the second phase of a start-up and you need funds to be injected in your business, then you should go with finding a venture capitalist. Venture capitalists are serious players in the business world and their funding is very time-sensitive, they will only fund a business that shows potential of “fast growth.” However, if you can convince them to fund you along with investments, they will provide you business networking opportunities for a better chance of success.
- 2. Angel Investors – Angel investors are individuals or a group of individuals who are willing to invest in a start-up. They are called “Angels” because they are friendlier than venture capitalist in terms of time. Along with just funding a business, they are very patient and good mentors who value relationships. Angel investors usually make an investment of $25,000 to $1 million. The only major drawback is they may be difficult to find.
- 3. Friends and Family – You can talk to your friends and family about your venture. There’s usually someone among them who would be interested in investing in your business. It is always wise to stay professional when you borrow money from your friends and relatives. It would be wise to ask a lawyer to draw a legal document stating the amount borrowed and other terms and conditions. Remember to inform them of the various risks of your business and also keep in regular contact with them.
- Look out for government grants – Depending on the type of business you are in, you can check out Small Business Administration for various government grants. There are different types of SBA programs such as Small Business Innovation Research (SBIR) and Small Business Technology Transfer Research (STTR) for those who venture into technology and research. You can also check out the SBA loan programs.
- Crowd-funding – This is a new source of funding that is fast becoming a vogue in the financial industry. This is a new strategy where a network of people come together to pool their money and other resources to support those who need funds to kickstart their dream ventures. The advantage of crowd-funding is that the money is a gift and not a loan; therefore, it does not come under taxable income. A point worth mentioning is that you do not have to take on financial partners.
The bottom line is, you need to choose wisely. Remember nothing is as easy as it looks, you need to do you homework to choose the right kind of financing from the right source at the right time.
Flickr image by 401K