One of the first challenges new entrepreneurs face is finding a way to finance their businesses. You have a great business idea but little money to implement it; and, like every entrepreneur before you, you try to scrounge enough money to launch your startup – your dream.
Getting your startup funded can be arduous. Unfortunately, most entrepreneurs make it even more difficult than it has to be by chasing options that are popular but are not realistic because they seldom produce results. Then they become discouraged when they are unable to get funding.
Are Angel Investors Really an Option?
Angel investing is often done by high-net-worth individuals looking to purchase equity from promising startup companies. They invest in the early rounds of equity raising, when the concept is being developed.
Angel funding is extremely difficult, if not impossible, to get unless your concept is truly outstanding. However, many entrepreneurs spend an incredible amount of time and energy trying to get angel funding. While pitching your plan to angels may help improve your presentation skills and business model, it rarely brings in any actual cash. This is because entrepreneurs often approach angels at the wrong time.
Don’t approach angels as soon as you have a completed business plan. Instead, wait until you have a working prototype and have tested your business model in the real world. This will increase your chances of getting funded and position you well above people that are just pitching a business plan.
Will Crowdfunding Finance my Business?
Crowdfunding has been gaining media notoriety and has become a very popular way to seek funding. Although it may be a popular way to look for funding, most entrepreneurs don’t get much out of it. However, crowdfunding can be valuable if your startup is developing cool, innovative products with mass appeal – like the Blink or Joulies. In this case, crowdfunding provides two key elements for success: real paid orders for your product and an idea of the market demand for your product.
However, I don’t think this type of funding has proven itself as a viable way to finance service companies or for-profit research. Also, you can’t use crowdfunding to raise equity by selling shares to unaccredited investors because you could run afoul of securities law. As such, I prefer to avoid this type of funding until it becomes more mature. If you want to learn about the challenges of crowdfunding, read this article.
Should Your Parents Finance Your Startup?
It’s not unusual for twenty-somethings to try to get business financing from their parents. Parents can be a double-edged sword though. If your parents have disposable income, know how to run a business, know your market, and believe in your product, their help can be invaluable.
However, if they don’t meet the above criteria, don’t ask them for money. Otherwise, you risk having your parents involved in your company and questioning every decision you make.
If you take this path, consider getting a loan from them instead of selling them equity. Although you will have to repay the loan, it provides your parents with a clean exit from your business.
I also suggest that you draft formal loan documents using an attorney. Sounds like overkill, but it isn’t. And be sure that the loan documents spell out everything in detail. My last word of caution: remember that even “silent partners” can be very vocal when their money is at stake.
Self-Financing. Bootstrap your Business
Most business owners – myself included – financed their companies by bootstrapping. The concept is very simple: you put whatever money you have into your company and run it on the cheap until it generates cash flow. I was fortunate to work in the telecommunications industry when the market was strong. I saved money for a few years while building my career. When the time was right, I cashed my stock options and became an entrepreneur.
One often-overlooked advantage of self-funding is that you keep your independence. You don’t need to answer to investors, parents, or anyone other than yourself.
One product that is very useful but seldom discussed is the SBA Microloan. This little-known program offers small loans – 13K to 50K – to startups and small businesses. As opposed to conventional loans, microloans have simple and easy qualification requirements, and they are often provided in conjunction with mentoring, which can be very useful for new entrepreneurs.
The advantage of a Microloan is that it’s often big enough to get your project started, allowing you to book your first clients or build your initial prototypes. You can then leverage your initial success to tap other sources of funding. Keep in mind that this is an actual loan that you have to pay back and becomes part of your credit record.
Microloans are offered through intermediaries with the backing of the US Government. The largest and most well-known provider is Accion.
Marco Terry is the managing director of Commercial Capital LLC, a company that provides financing to businesses with cash flow problems. You can find him on twitter @marco_terry
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