Guest post by Sara Mackey
Dave’s Note: This is the first time we’ve had a guest author on the BERKONOMICS site. Sara focuses upon another side of small business financing not typically considered in the angel and venture world, financing from sources for companies that will probably never be attractive to those niches.
So, you’ve been thinking about starting your own firm for the past ten years. Your business plan is ready. Your family is all for it. You have enough in savings to get started, but how and where do you go to find additional funding sources?
The times have changed, and many of the sources available in the past have become risk averse or moved on, but there are new alternatives. There is still abundant money available for early stage investment, but many of the rules have changed, as well as the processes for accessing these resources.
Here’s the new truth: It is rare to get anyone to invest in an idea these days. The great majority of investors who did invest in “idea stage” businesses, lost fortunes when the Internet “bubble” burst at the beginning of the last decade. Many of those investors, individual and institutional, are still licking those wounds; and as a result, investors today want to see a working business model, and customers that are willing to spend good money for your specific solution.
Another fact: The “uninformed” small businessman usually tends to approach the most difficult funding sources first, wasting an inordinate amount of time, and then failing to raise any funds, making his or her situation more serious in the process.
[Email readers, continue here…] When searching for funding, one of your primary tasks should be to start where it is easier, and proceed from there. So here is a brief list in ascending order of time and process difficulty:
Friends, Family and Business Partners: Your journey should begin with people that know you, trust you, and believe in your business ability. If you cannot convince them to invest in your plan, then why would anyone else even consider a proposal to invest in someone that they did not know? Start here, and then move on.
Local Community Bank: Big banks rarely lend to small businesses, but small community banks do, usually with collateral and personal guarantees. You want to establish a relationship here to gain access to their network at a later date. They can also help you with an SBA (Small Business Administration) loan, if that path is correct for you. If you already have high-limit credit cards, these happen to be the preferred funding source for most small businesses today.
Independent Third Parties: This area for securing business loans has witnessed the greatest degree of change, primarily due to removal of communication barriers using the Internet. There are a host of companies that can be accessed through web-search engines that can provide both secured and unsecured financing. Factoring companies can help you with working capital needs when your business grows quickly by filling the money “gap” created between new billings and actual collections. Small businesses typically underestimate this need.
For unsecured loans, the universe of options is broad. If you are in retail, then a merchant cash advance may help you and grow with your business. Fees may seem high at first, but, on a total cost basis, these funding sources can appear more reasonable. Credit risk related to small business is heightened in tough economic times, the reason most banks refuse to support this arena. Most economists, however, purport that our recovery will never stabilize until small businesses can access capital, hire new employees, and grow.
Crowd Funding: The Internet is at work here, especially for obtaining early stager seed money. An entrepreneur utilizes online communities to solicit pledges of small amounts of money from individuals who are typically not professional financiers. Research the Net for guidance in this arena, which is changing as laws enabling this are evolving.
Venture and Angel Funding Sources: Business loans or capital raises are very difficult to arrange in this area, unless the business has a potential of growing to over $50 million within five years, and usually is able to demonstrate that it has protectable intellectual property of value. Competition is high for these resources, and often there is a substantial ownership stake, if not control, for the investors, depending upon the value of the business and success in using the first moneys invested. If your business does not fit into these parameters, it is better to focus on other options.
Sara Mackey is the marketing director and a client manager for Connexx.com, an authoritative guide in the field of small business financing. She has worked with start up companies for nearly a decade in helping with the development of business plans and securing financing.