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Dear StartupNation : I have great ideas for my new business, a knack for organizing, a killer business plan, good contacts and I’m a tireless worker. Plus I’m young (not bad looking either) and have talent galore. But one thing’s missing: MONEY. I’m totally flummoxed about funding. Can you explain the options and suggest some helpful resources?
Well, at least you’re not short on self esteem! But money — or the lack thereof — is the missing link in many a grand business plan. Startups often launch with less than they need, and struggle from Day One. Adequate financing for your business and the know-how to use it wisely are crucial ingredients for your business to grow and thrive. Inadequate funding limits what you can do.
Methods to finance a business fall into a few broad categories — either debt or equity financing from institutional or informal sources.
Debt financing is a loan you pay back. Common sources include: family and friends, personal credit cards, home equity lines of credit, commercial bank loans and bank loans backed by the US Small Business Administration (SBA). Some small businesses also receive a type of funding from suppliers and vendors in the form of special payment terms, discounts or even direct loans. Suppliers want you to succeed, so they are sometimes willing to help.
With equity financing, you give up pieces of your business in return for cash. The good news is, you generally don’t have to pay the money back. The bad news is that the people or institutions that put up the money — your investors — now own part of your business. Venture capitalists work this way, and stock offerings are also a type of equity financing.
Other funding or cost-sharing options include:
- Partnerships, joint ventures, alliances and co-branding arrangements
- Business incubators. These don’t generally offer cash, but do provide crucial support in the form of free or reduced rent and business services.
These resources can help you learn about and gain access to the right type of financing for your small business:
- The SBA 7(a) Loan Guarantee Program is Uncle Sam’s main small business financing tool. It helps secure loans for small businesses that are unable to find financing on reasonable terms through conventional lending channels, and will guarantee up to $1 million.
- The National Venture Capital Association, an industry trade group based in Arlington, VA, can help link you to hundreds of venture capital and private equity firms nationwide. The NVCA website has a good “Industry Overview” that describes the basics of how venture capitalists work, including the different types of firms and kinds of entrepreneurs they want to work with. Best of all is the list of NVCA members, available on the website for free.
- VirginMoney is a resource every entrepreneur planning to borrow from family or friends should know about. This site provides all of the loan administration, recordkeeping, payment processing and structural support often lacking in loans of this type. A free 16-page report called Financing Your Small Business: How to Borrow from People You Know addresses common concerns, including the debt vs. equity issue, and offers helpful worksheets and sample Promissory Notes.
- The National Business Incubation Association offers information on incubators and can help you locate one in your area. Look under “Links to Member Incubators” in the Resource Center and select your state from the pull-down menu.