Investing In Success: Startup Financing

Providing much needed cash to small businesses is big business, don’t believe me?  Here is my spam inbox just from one point yesterday.  YES THOSE ARE ALL SMALL BUSINESS LOAN COMPANIES…

 
When looking to start a small business or startup, one of the largest (and most important) decisions one must immediately make is “How am I going to get the cash to get this started?”.  This is an experience I have been through myself so I will examine four of the most popular routes that I examined as well; each with their various benefits and drawbacks that must be properly weighed.

1. SBA loans (small business association loans), angel investments
2. Angel Investors
3. Venture Capital funding
4. Bank loan
5. Seeking out financing professionals
6. The “Family and Friends Loan”

SBA loans are special designed for the hardship of receiving a typical loan and therefore increase the chances of receiving bank loans yet they have very strict guidelines. The bank tends to look at the investors previous 2-3 years and they find the worst possible credit worthy events in their history. Since the banks follow this protocol, it makes it difficult for young companies to prosper.
Angel Investors have experiences within different industries that lead them to be helpful not only from a financial standpoint but as well with equally valuable guidance. Angel investors also have very flexible business agreements. This of course comes with the caveit that an angel investor is getting involved in the business very early and therefore will expect a sizable “slice of the pie” as they are shouldering a good bit of risk. Due to this nature of risk, it is quite uncommon for angel investors to reinvest in future rounds of financing.
VC funding is what people think of when they think of startup funding.  Venture Capital firms often invest large sums all at once that catch the headlines in all the industry publications. They bring instant credit to the company as well as open doors up for networking with otherwise difficult connections. Another name for VC is “vulture capital”, at times they get a bad reputation as being all about the money and they will take any step to make sure it gets returned (nothing that I think any of us that have loaned a friend money can’t related). They also go in any direction they want without regards to what the company actually wants with the expressed purpose of a windfall which can be massive in the case of investments such as Snap which made early investors billionaires.
Bank financing offer a wide range of funding amounts and payback options. They qualify time for funding which ends up being quick. Consequently, bank loans are difficult to obtain and criteria is changing. A couple quick things to note with this route:

• Entrepreneurs owe the borrowed money whether the company succeeds or not, meaning that the decision to take this kind of financing requires a ton of planning and confidence as you quite literally can bankrupt yourself
• A large amount of documentation required which ends up being time consuming and tedious. This leads to people being confused since they don’t have as much experience and aren’t explained everything they should have been explained. No need to explain why this can end up being dangerous…

Financial professionals lay out funding criteria so its easy to understand. The small company only pays IF and WHEN they receive the funding needed. Funding platforms make it possible to receive financing without going to a bank. You can think of these kind of financial professionals as an extension of your team.  A couple things to note:

• Your company pays this individual a small percentage of the funding received
• Financing professionals should be thoroughly vetted as they will be the only people in direct contact with lending institution they secure

Friends and family always seems the most tempting as the funding is obtained quickly and without much “holding your face to the fire”. The terms are always flexible since the company knows the “investors” well. Also, there is a potential for mutual invested interest. As a result to friends and family, there is always pressure on the personal relationships. There is limited ability to give advice since friends and family may not know the business as well. Lastly, family and friends can’t bring anything more to the table beside initial capital which can be a major benefit in other forms of funding.
In future posts I will examine each of these six routes in more depth, don’t hesitate to reach out if there is anything you would like more information on!
BONUS – The Golden Ticket, “Client Funding”.  Client funding is an option for certain types of businesses that may not have high operating costs. According to Isaiah Bolinger, CEO of Trellis, “I personally think the best route is to get client funded. If you can develop a product or service quickly at low cost and get customers to pay for it you can leverage customer revenue to grow without debt or outside funding. This is not easy to achieve, but certainly the best route for you to build a brand in the early stages without taking on outside capital and the risks associated. The advantage here of course is that you literally retain all of your business and don’t owe anyone money/interest for capital raised.