If you recently won the lottery, are independently wealthy, or got all 5 sharks to bid against each other for investing in your business- you can skip this read. However, for those of you who have a brilliant idea but are going to need some financial assistance in getting it off the ground…read on.
When you boil it down, there are really only two types of business financing. The first is debt financing. This is typified by taking out a loan from the bank. No matter what happens with your business, you are going to owe that loan amount and some percentage of interest. The second option is equity financing. This is typified by Shark Tank…where in exchange for an ownership interest, an investor outlays funding for the business. The investor is assuming the risk that if the business fails, they lose their investment amount, but if it succeeds they are there to take a large cut of the spoils.
Both types of funding come with their own pluses and minuses, so let’s talk about some of those that we can expect to find from traditional funding sources.
Credit Cards: Just be careful. If used appropriately, there is generally a 30 plus day float on expenses that can be helpful in a cash flow crunch, but if you get behind or plan on using them for long term financing, the interest will be crushing.
Parents (Family Members): “Mom…Dad, can I borrow the car, oh, and $50K to get my business started?” Your family is very often your first investors or lenders for any small startup. The pluses are generally the favorable financing terms, but going into business with family can sometimes present some sticky wickets. To avoid problems, we would suggest preparing contracts and promissory notes to spell out for everyone the terms of the relationship.
Bank Loans: You can get a line of credit or take out a loan from a bank. Dependent upon the size of the loan, there will generally be a sliding scale as to the amount security you will have to provide. For larger amounts, expect that there will be collateral pledged in exchange for the money. Spend a little time researching if you qualify for government sponsored SBA loans here http://www.sba.gov/. Also expect that you will have to personally guarantee the loans or get a cosigner to pledge to pay in the event of a default.
Crowdfunding: Many of you have probably heard of the new JOBS Act which is opening up internet crowdfunding in order to promote small business investment with fewer restrictions. The SEC is currently in the 270 day window in order to promulgate rules of the road for JOBS investment, so as new information becomes available we’ll be blogging about the advantages and disadvantages of this new medium. We are optimistically hesitant to see where this goes and if crowdfunding will only make it more difficult on businesses as it seeks greater investment in the future.
Angel Investors: Angels fill the void between the initial round of funding (Parents) and the venture capitalists of later rounds. There is generally an active Angel network in most metropolitan areas, so do a bit of research to determine if you’re ready and need their help. For Dallas be sure to check out http://dallasangelnetwork.com/
Expect that you may likely get a number of “no’s” as you feel out the best financing options for your business. That’s ok and will only help you refine your business plans. You will find that as you move up the food chain and your product or service gains more traction, you will be excited about the financing options made available to you.
Geoff Keller is a founding partner at Vela | Keller PC in Dallas and focuses his practice on representing small businesses, real estate and criminal law.