Financing your new business can be frustrating, especially if you’re not willing to share smartly. Words by David Wojcik
You have a revolutionary idea. OK. You need money to finance it. Still OK. You don’t have any money of your own to put in it. Not OK, you have a problem. Many businesses start on a shoestring, but at least they have one. There are several sources for financing. You just need to get in front of the right provider.
1: CRACK OPEN THE PIGGY BANK
The true entrepreneur will risk it all and then some. They put up savings, retirement savings, mortgage their house and max out their credit cards to take their idea to market. The reason they do this is because without a proven track record or any track record, why would anyone invest in their idea.
2: CRACK OPEN THE VAULT AT THE BANK
The bank has lots of money, other people’s money and they want to loan it to you in order to collect interest. Although it seems the banks try to find ways not to give you a loan, they really are in the business of providing loans. The problem is, your request for $25,000 or $50,000 is not a big enough deal for them to consider. That’s why they are more inclined to give you a mortgage on your home or a line of credit. The other reason for the banker wanting to give you a mortgage or line of credit, is you’re probably dealing with your personal banker and personal bankers have different objectives from business bankers. Business bankers require a lot more information, business plans, projections and more. So get ready for a barrage of due diligence at the business banker level. And yes, you will need to have hard security for the loan.
3: CRACK OPEN A FRIEND’S PIGGY BANK
Find a partner that has the money and a strong belief in you and your idea. Partners that say they want to be silent, rarely are. If they are inexperienced investors, you can expect to hear from them on a regular basis. Remember to treat them as an investor.
Agree to what you will share with them and how often you will be reporting. Many a friendship has been ruined through partnership, so make sure everyone understands the ground rules at the beginning.
4: FIND AN ANGEL INVESTOR
Angel investors are people who have made their money and are looking for opportunities to invest. This is usually seed capital and can start as low as $25,000. Angel’s generally don’t want to be involved in the day to day operations of the business, but they do like to stick with industries they are familiar with. There are many different groups of angel investors and many will band
together and share the risk on various ideas. Check out the National Angel Capital Organization for more information.
5: VENTURE CAPITAL
Venture capitalists are the next stage in financing. While angels will provide the seed capital required to get things off the ground, the venture capitalists come in with money to take the business to the next level. The next level being, national or international in scope. Open a manufacturing location. Finance an IPO. Venture capitalists are very hands on and will want a piece of the action. Usually a controlling piece and rightfully so, considering they’re putting in a big chunk of cash. As with angels, venture capitalists don’t come in a “one size fits all”. You need to find a group that specializes in your product or service area.
6: INTERESTING BUT UNKNOWN
A couple of other options are not as well known. Two are through Argosy Partners. Their “Chips off the table” and “Shotgun fund” allow existing business owners to access cash that is tied up in their company. Chips off the table is designed for owners that have all their equity tied up in the company and want to access some of it. The Shotgun fund allows owners to hang on to their company when a partner exercises the shotgun clause of partnership/shareholders agreement. Another unique way to finance is through Min Mar Group. They find publicly traded companies that are dormant, wake them up, dust them off and then help you take your company public for a fraction of the cost.
Financing your business requires you to make choices and sometimes they are painful. The best advice is to start with a solid business plan, so you know how much financing you need. There is a rule of thumb in financing. It will always take you twice as long and cost twice as much as you planned.