Your mother always warned, "Don't put all your eggs in one basket"
and those words of wisdom can be applied when financing a business.
There are a number of methods that can aid buyers in financing a
business. Buyers must recognize their available resources such as the
seller, lenders, and investors.
As a child, we're encouraged to
"dream big" and told that nothing can stop us, but ourselves. As
entrepreneurial adults, this idea of dreaming big is often a part of
your everyday routine, but it is inevitable that at some point you'll
come crashing down from those heights into reality. The realization that
financing your particular endeavor can instantly dampen even the most
impassioned enterprising individual can get you down. To put it bluntly,
"Don't let it".
Having a reality check on the difficulty of
securing financing for a business can be the first step towards making
your dream an actuality. There are numerous types of financing
available, some more unorthodox or obscure. If you take the time and
effort to research all avenues for funding you will be rewarded.
There
are two main types of financing: debt financing and equity financing.
It is important to you and the success of your business that you
familiarize yourself with the types of financing in order to choose,
seek, and finally, obtain the right form for your needs.
Debt
financing involves borrowing money that will be repaid over a certain
allotted time with a set interest rate tacked on. The time of such
financing can be short term or long-term. In most cases, short term
financing would include repayment within one year, while long-term
financing would entail repayment in a time period that exceeds one year.
An
advantage of this type of financing is the fact that the lender will
not gain ownership in your business. You remain in control and your only
obligation to them is to make regular and timely payments. In the case
of small startups, a personal guarantee is often needed to facilitate
the closing of the financing deal.
Equity financing, unlike debt
financing, will involve giving the financing entity a share in the
business. Some business owners dislike the idea of losing any amount of
control. On a positive note, this type of financing does not incur debt.
This kind of freedom from debt can give a greater sense of security in
starting a new business. In addition, some entrepreneurs find great
value in their equity financing partners, and see their presence as an
asset.
The type of financing you will choose is based largely on
the needs of your business and the kind of collateral, or available
assets you have to offer. A substantial amount of debt financing can
lead to poor credit and a shortage of funds in the future due to an
inability to apply for more financing. A business that becomes
overextended, offers little collateral, and is steeped in debt is not an
appealing option for many investors.
As previously mentioned,
there are other more unorthodox methods of obtaining funds that can
certainly prove to be beneficial to your business. Some options can be
found in your own circle of friends and family. One benefit of this type
of financing is obtaining the money and a silent partner who will most
likely not interfere with your business. It can also eliminate some of
the red tape involved with more traditional forms of financing. This
does not mean you can simply use a verbal agreement or "shake on it" to
signify and bind the transaction. This is still a strategic business
move and you must treat it as such which means proper documentation,
clear terms, and mutual understanding of those terms.
Relationships
can be ruined over inept efforts with this type of financing, so value
your business and the other person by treating it with professionalism,
attention to detail, and respect. Don't become the black sheep at the
next family reunion over some misunderstanding or your falling behind on
payments.
A few other options that are largely unknown to those
who haven't done research include unsecured loans and micro-loans.
Resources such as TheSnapLoan.com or Prosper.com offer loans based on
cash flow, credit score, and debt-to-income ratio. Government grants are
also a largely untapped resource that is made available to
entrepreneurs. Simply researching the website Grants.gov can be
extremely helpful in your search for funds.
Venture capital is
another route that many entrepreneurs look to due to the amount of
funding that can be procured. A venture capitalist will likely offer
larger sums of money that can be of great assistance to your business,
but they will also gain a certain portion of control and ownership. This
type of funding however is usually scarce due to the assumption that
many startups will inevitably fail. You will need to find someone
willing to take the risk and who sees potential in your vision.
This
type of person could also be found in a more palatable option known as
the Angel investor. The Angel investor typically has a high net worth
and like the venture capitalist, must believe in the product and the
person behind the product. Their loan often converts to stock, preferred
stock, or convertible bonds.
Les Brown, an author and
entrepreneur, says, "Shoot for the moon and if you miss you will still
be among the stars". This is an extremely appropriate sentiment as it
encourages you to keep dreaming big and ultimately those dreams combined
with perseverance and research will take you closer to where you want
to be.