FastTrac, Kauffman Foundation
When seeking external cash to support growth, remember that just like you, funders have specific goals they intend to accomplish with the relationship. Some funding sources seek an ongoing relationship while others work towards promoting small businesses and still others attempt to earn as high a return as possible on their investment.
Hundreds of funding options exist out there, but don't get confused by the number of options. Take time to identify your own goals for funding so that you can match them with sources that will be more likely to have a desire to help you. Four major goals to consider are the amount of money needed, the use of the funds, the costs, and the consequences associated with the funding.
The amount of money you need to finance the company has a bearing on available sources. When you need a small amount, it might be fairly easy for you to obtain funds by pledging personal assets, such as a mortgage loan. Banks will typically only provide commercial loans within a minimum and maximum range. Many angel and venture capital investors are only interested in amounts beyond the bank's maximum range. In each case, the amount you can acquire through financing depends on your business's ability to repay the money through loan payments or distributions.
Use of Funds
Will the money be used to buy fixed assets and inventory, to fund accounts receivable, or for research and development? Each of these options requires different kinds of money. For example, a coffee shop owner seeking funds to purchase an espresso machine that will be useful for four to six years in producing revenue would likely seek a loan with a payback schedule of a similar time frame. In this way, the debt repayment is due in the same years that income will be generated with the machine.
Money is expensive, so consider the costs. Private investors such as angels, investment bankers, and venture capitalists typically want a 25 percent to 100 percent return per year for the use of their funds. One of the reasons for the continued popularity of bank financing is that it is an affordable source of money that can reach upwards of 1 to 5 percentage points over the prime interest rate.
When obtaining funding from debt sources, you need to consider the consequences of not being able to repay the debt. If lenders go after the collateral, the worst consequence might be that you will have to close your business. Failure to provide your investors adequate returns could also mean you lose control of your business. The consequences depend upon the funding agreement and what you have offered as collateral. Consider the impact that outside funding can have on your control of the business before you choose a funding source.
© 2007 Ewing Marion Kauffman Foundation. All rights reserved.