Funding for Starting a Business - What Options do You Have?

You need to be brutally honest with yourself about the funding options you have to start a new business. This is especially true if you're a first-time business owner or if you're a small business. Funding for starting a business is available, but knowing what your best options are helps you prepare a stronger business plan, better targeted towards likely funding sources of your business startup.

Angel Investors. Banks. Venture Capital. etc. Which are your likely sources? Which aren't?

Particularly if you're a small business owner or first-time entrepreneur, there's a very good chance that your primary financier is going to be...

YOU.

Unfortunately, fewer options are available to new small businesses than you may think. Let's look at some of the other funding options first to see why you are your best-likely option.

Banks

Unless you have liquid or real assets to put up as collateral against a bank loan, you're going to find it difficult to get financial support from a bank. Even if you do, you'd want to think carefully about the risks involved in making such a personal guarantee. For example, putting up your house as collateral against a bank loan could prove to be risky if your business were to fail. You could just as soon find yourself without a house as banks will do what is necessary for them to recover the money they lend.

Banks and most other credible lending sources want a guarantee for the money they lend. The guarantee is usually going to be at least the value of the loan, if not greater. When it comes to a new business, there are no guarantees, other than any personal assets the owner may be willing to put up as collateral.

Of course, banks have several other criteria such as your credit history, and believe it or not, your character.

Small Business Administration (SBA) Loans

Many new business owners believe their chances of securing a loan through federal government agency-supported programs like SBA improve. The principle behind SBA loans is to encourage banks to lend money to small business owners, by guaranteeing a portion of the loan - at least half but as much as 90% of the loan. This allows banks to more comfortably lend to "riskier" borrowers.

But it's not likely the case that they will. In fact, you can expect banks to still ask for collateral and personal guarantees in order to approve an SBA loan. While banks have more than 100% of the loan secured through SBA guarantees and your own personal guarantee, obtaining such a loan is still difficult. There's also a lot of bureaucracy involved in arranging SBA loans.

So unless you're willing and able to give a personal guarantee to SBA lending banks, this may not be the viable option you might have hoped for funding for starting a business.

Venture Capital

Let's quickly dispel a wide-ranging myth that venture capital is a serious option for funding new small business ventures. This is not the case. Venture capital firms are very selective in what businesses they invest in.

Venture capital investors really are looking for companies which can provide a solid return on their investment with a clear and profitable exit. This is why they invest in profitable and growing large private businesses which aim to go public or be taken over or merged into an even larger company.

If you're a new small business owner, venture capital is not a likely source of funding for starting a business. This is a highly specialized group of investors investing several millions of dollars into a few strong private businesses.

Corporations

Corporations may look to invest in small businesses, particularly those which develop products or services they intend to eventually own. In other words, a corporate investor will likely aim to take over your business at the point it can profit from selling your product or service.

If this matches your business start-up goals, then consider this option. Of course, you should have remarkable influence or solid contacts within the corporation, and have very positive indications that the company is seriously interested in your product or service.

Going Public

This is not a real option for small business start-ups. Unless your business has annual revenue in the high double-digit millions of dollars, you should not be considering a public offering as a source for funding for starting a business. Relatively speaking, only a select few companies ever get listed out of the hundreds of thousands of businesses operating.

This is all a bit discouraging, I know. But there's light. Let's look at your more likely options.

You

9 out of ten new small businesses will start-up using seed money from the owners themselves. Knowing and accepting this reality as a small business owner helps you plan funding for starting a business more practically and accurately.

Interestingly, 9 out of ten businesses also fail within the first three years. So, while you need to be prepared to invest personal funds or take out personal loans to get your business off the ground and succeed, also be well aware of the very real failure rate. In other words, be willing to invest only what you're willing to lose. Most business loans and credit cards for startup businesses require a personal guarantee, so you'll want to be very particular about any money you borrow. Learn about benefits available with Business Credit Cards from American Express OPEN.

Family and Friends

Family and friends actually present an excellent opportunity for funding for starting a business. Yes, there are risks involved when it comes to mixing business with family and friends - beyond money itself. Still, they may be more willing to help you and see you succeed than strangers. At the same time, an attractive return on their investment allows them to benefit from the arrangement - so if done so properly, this can be a win-win situation.

Be sure to select family members or friends who understand and accept the risks involved with any new business and who are prepared to accept the possibility of losing their investment. These are people who you trust and with whom your relationship will not be soured in the worst case scenario.

Angel Investors

Angels look for small businesses to invest in. They are wealthy individuals and have the ability to provide funding for starting a business. You can find angels through "matchmaking" websites such as fundinguniverse.com. You can also find angels through professionals you may have a personal relationship with such as lawyers or accountants.

Angels present a good option for funding a new business. But you can also expect them to be heavily involved in the running of your business. They see themselves as partners, and so should you. Because angels focus on industries they know well and have experience with, accept the likelihood that they will want a direct hand in directing and running your business.

The high risks involved in investing in a new business are no secret to angel investors. So they demand a high return on their investment should the business become profitable.

This is natural - most investors prefer a lower yield in safer investment than a higher yield with a riskier investment. So really, Angels are taking a higher risk investing in new small business.

Also, while Angels are a good potential source of funding for starting a business, they are strong negotiators and are not easily convinced. So make sure you have a strong business plan with a solid case backed by thorough research.

Knowing your Funding Possibilities helps you tailor your business plan

With all of the funding for starting a business options on the table, you have to carefully analyze which best your business, and which are the most likely sources. Through this kind of analysis, you can better tailor your business plan to address the concerns of those you seek funding from.

Entrepreneur Ehsan Bayat was able to secure government loans from the U.S. to help bring a telecommunications network into the Middle East, helping jumpstart his business' success.

Useful Links

• Business Plans for Funding
• Funding Sources for Small Business
• Minority Business Funding - Does it exist? How to find it
• Alternative Business Funding - your choices
• Finding Angel Investors

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