Strategies for Funding Your Business
One of the key elements in starting or growing a business is developing a comprehensive financing strategy. A long-term plan can help reinforce short-term spending discipline and reduce the likelihood your business will burn through capital too quickly.
Creating a capitalization strategy requires an understanding of the business activities your company plans to finance, estimates of how much these activities will cost, and knowledge of appropriate sources of financing.
Once you understand the business activities you need to finance, you can develop an annual budget and estimate your capital requirements for at least the next two years. Many experts recommend planning for worst-case, realistic, and best-case scenarios. This approach may decrease your likelihood of underestimating your capital requirements, which could cause you to run out of money or pass up potential opportunities. You may want to consult outside sources (such as your accountant) to ensure your budget is as reliable as possible. Your local chamber of commerce or a regional business association may help you estimate expenses such as utilities or payroll that tend to vary regionally. A professional association that represents your industry may have information about standard costs, margins, and financial ratios.
After researching your capital needs, you're ready to consider potential sources of funding. The first source should be your own capital. You maintain total control, but would need to assess the consequences on the other parts of your financial plan. Of course, the use of the capital is risky, and may not deliver the steady type of investment returns that you’ve experienced from other passive investments.
Family and friends are another source of capital. From this crowd, you may get more flexible terms, but your new family partners may not add much in the way of management or entrepreneurial experience.
Banks are not exactly the best place to finance a startup business unless you really don’t need the money. It is most likely that a bank will want your personal guarantees along with a lien on your real estate as well as your other accounts maintained at the same institution. If you are considering this option, it may be best to secure your personal financing first, before you resign from your current job. Banks today rely on your current income as much as they do your credit report and your asset structure.
Loans guaranteed by U.S. Small Business Administration or a business development program sponsored by state government are another option. These may take a little more time, but are designed for small businesses.
Another category of investors are called “angel” investors. Angel investors are investors who are familiar with the startup and incubation businesses. These people are often former executives or successful entrepreneurs themselves, and may contain considerable management or operational experience that you may use. Sometimes these angels also require an active role in the company, yielding less than full control in your hands as the ventures founder.
Regardless how you do it, have a good CPA and Attorney on your team, and have documentation and agreements that spell out the deal in plain English.
This article was written by John P. Napolitano