Strategies for Funding the Startup or Expansion of a Small Business

Ways to Find the Capital to Help You Succeed

You have a great idea for a business and you’ve followed the recommendations in our blog outlining the steps to take to maximize your likelihood of long-term success—you have a solid business plan, you’ve identified the tools you need to succeed, you’ve put together realistic financial goals and projections and you’ve lined up a great advisory team. There’s only one thing left to do—secure the funding you need to make your dream a reality. There are a number of ways to raise the money you need to launch your business, all of which can work for the right situation. Let’s look at some of your options, identifying some of the advantages and disadvantages.

Before we look at specific strategies, though, let’s identify the three different ways that your enterprise can acquire cash for startup or expansion:

* By gift—Typically limited to investments by friends or family members, this type of cash infusion costs you nothing (except perhaps some anxiety if the business fails). You won’t have to pay anyone back and you won’t have to give up a portion of the business in exchange for the operating capital.

* Through debt—You may be able to borrow funds, either through an institution or private investors, including friends and family. You won’t have to give up any interest in the business, but you will have the loan repayment commitment hanging over your head.

* Through an equity investment—You may be able to exchange ownership in the business for an investment of funds. You won’t have to worry about paying the investment back, but you will have to share in any profits.

Evaluating the Sources for Funding a Small Business

Here are some of the most common methods used to fund a small business:

* Funding it yourself—If your startup costs are relatively small, you may want to consider what is known as “bootstrapping.” That’s where you essentially fund the startup out of your own pocket, using savings, liquidating investments or using low-interest or no-interest credit cards. You’ll have to pay off any credit cards you use, but may be able to do so more flexibly than through a bank or financial institution. If the business fails, you may have the option of bankruptcy, where you can discharge some or most of the debts, including the credit card debt.

* Fund your business through friends or family—Though this can be a two-edged sword, you are usually better off approaching friends and family before going to venture capital firms, business incubators or angel investors. As a general rule, friends and family won’t try to get involved in your business, letting you do what you know how to do (unlike professional investment entities). On the other hand, relations with friends and family can be difficult if the business goes south.

* Consider using an online “crowd-funding” site—The most well-known is probably Kickstarter, but there are other similar sites available, where you can get thousands of individual investors to collectively kick in enough money to help you start your business. In many instances, you won’t have to sacrifice any ownership in the company and you won’t have to repay investors. It can also be a great way to jumpstart your market, as investors may become customers.

* Get a loan through a “peer-to-peer” lending website—There are many such websites, from Upstart and Funding Circle to Lending Club and The Bottom Line. As a general rule, because peer-to-peer lenders don’t have the overhead of bricks and mortar companies, they can offer funds at lower interest rates. Be careful, though—interest rates can be extremely high if you are considered a credit risk. The amounts available through peer-to-peer lending are typically fairly limited.

* Apply for a small business loan—The Small Business Administration does not lend money, but provides guarantees to banks and lenders on loans taken out by small businesses. Because of the guarantee of repayment, lenders are willing to take risks on new businesses that typically cannot get funding from a bank.

There are also “alternative” small business lending institutions, companies that will allow entrepreneurs to borrow without an SBA guarantee. Typically, these institutions are private finance companies and will set up repayment automatically. They also tend to offer a broad assortment of funding options, including lines of credit, cash advances and standard loans.

* Become part of a business accelerator or incubator—Sponsored by private companies and municipal entities, business incubators look to develop and grow new businesses by providing business guidance, as well as financial support. The National Business Incubation Association estimates there are more than 900 business incubators across the country. Most business incubators are willing to give more than peer-to-peer lenders. The investments can take the form of either debt or equity investments.

* See if there’s a small business competition near you—With the success of Shark Tank and other similar programs, many municipalities are following suit, setting up competitions where entrepreneurs can make their pitch for investments. Join the National Association for the Self-Employed and you can apply for a $4,000 grant to fund a specific need. There are a number of entities that provide grants to women, minorities or others in small business.

* Take advance orders for your product—If you have a product that you know will sell, spend a little bit of money to let people know about it, and then take advance orders. If your startup costs are well-managed, you can use the funds to get over the hump and get the business rolling.

 

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