So You Need Some Money?

by smallbizbee · 7 comments

Unless you are blessed with a goose laying golden eggs, you will inevitably be faced with a need to finance your small business. Whether it be a small business loan, a loan from friends and family, or by using angel investors and venture capitalist, you will need cash to get your business up and running and to help it grow. Finding the money your business needs may seem like a daunting task, but with a little planning and resourcefulness it should be easier than finding that magical goose.

The very first question you must ask yourself is how much money do you need?

Need $0-$25,000

At this level you are best off looking to friends, family, or some micro-loan programs, such as Prosper.com (disclaimer: I have no affiliation or financial incentive to mention Prosper). You'll get your best interest rate from your friends and family (My mom loaned to me at a very favorable 0% rate), but even at a lending site like Prosper.com you can fill loans up to $25,000 for some very competitive rates if you prove you're a worthy borrower (meaning your personal credit is in order) You may also want to work with the bank where you do your personal banking and inquire about personal loans or small business loans.

To rank your options in the $0-$25,000 category from easiest to obtain to hardest and from least costly, in terms of interest, to more costly would look something like this:

Family
Friends
Prosper.com or other micro lending site
Bank/Credit Union
Credit Cards

Need $25,001-$200,000

In this range you're going to have to start getting more serious. Not that you weren't before, but unless you have a rich uncle you will be dealing with banks and other larger lenders who will want to see business plans, financial projections, marketing plans, and anything else that will put their mind at ease about lending you money. In this range you are an "in betweener", you're needing more capital than you will probably be able to raise from friends and family, yet not quite to the level that an angel investor or venture capitalist would be interested. Small business loans at your bank or credit union are a viable option, as well as small business loans through the Small Business Administration. Also there is nothing saying that you can't get a loan for a portion of what you need from the bank or SBA, and the rest from friends, family, etc. Another option depending on your personal financial situation would be home equity loans, but that really is a personal decision as to whether you want to put at risk that equity. Rates can be favorable depending on your credit score, the size of the loan, and the amount of equity in your home.

Again to rank your options in the $25,001-$200,000 category from easiest to obtain to hardest and from least costly in terms of interest to more costly would look something like this:

Bank/Credit Union
Small Business Administration (usually rates are prime plus 3-4 points on loans in this range)
Home Equity Loan

Need $200,001 - $500,000

Your options open up even more here, but you will have to work a little harder to get this money. In this range you still have the option of the SBA loan programs (usually those programs have a maximum loan amount of $2,000,000). If your business plan is sound and the outlook for your company is promising, you should be able to attract the attention of angel investors. Angel investors can be a great source of funding if you can find them. DO NOT just Google "angel investor" and start sending your business plans to whomever you find there. The best way to get your business and plan in front of these angel investors is through good old fashioned networking. Try joining a local small business networking association, or look for a local chapter of the Angel Capital Association. Also your bank may have resources to put you in contact with these people.

Remember also, that when dealing with angel investors you are more likely going to be trading availability to capital for a share of your business. You typically won't be dealing with groups or individuals who are happy with just loaning you money and charging an interest rate while you pay it back. They will most likely want an equity share in your company as well as some oversight in how your business is run. Your angel investor may only want to chime in on big decisions, or they may want to take on some of the day to day operations. Be ready for some of the lost control in exchange for the money you need to grow your business.

To rank your options in the $200,001 - $500,000 category from easiest to obtain to hardest and from least costly in terms of interest to more costly would look something like this:

Small Business Administration
Angel Investor

Need $1,000,000 or more

Congratulations, you and your business have reached the big time. If you're looking for this kind of money your business is growing, or there is real potential on the horizon. Now you just have to find the cash! In the million dollar plus range you will most likely be dealing with venture capitalist (or VC's), who you will find much in the same way as angel investors, through networking or contacts you have in the circle of professionals you come in contact with. Much like with angel investors, VC's are going to want a share of the equity in your company. They will want a say in the daily operations, and/or the big decisions facing your company. VC's usually retain the right to replace management teams, dictate strategy, and drive performance. Their money is on the line and your business succeeding is usually the only way they will get it back.

Some tips on dealing with Venture Capitalist:

You need to prove to them your company is the next big thing, or able to capture a decent size share of a large market (think billion dollar market plus)
Show them you and your team have the knowledge, skills, ability, and experience necessary to grow your business...quickly!
Play to how and why your company is better than the competition
Show them your bottom...line that is. Your business needs to show it can make money, capture the market share, and grow.
Have an exit strategy. VC's want to see your company bought for a huge profit, or an equally lucrative IPO within 5 years or so of giving you the cash.

When dealing with angel investors and venture capitalist be sure to:

Have a well developed business plan
Be prepared to sell yourself, your business, and your plan. You will make or break whether or not you get funding.
Prepare and executive summary along with the business plan that you can give them. Two pages is plenty and it should include:
- Your mission
- Your vision
- A clearly defined outlook for your business
- Explanation of products/services
- Identify who your competitors are, how you will compete, and why you are better
- Financial projections - short term, and long term
- Future capital expectations and needs.

So there you have it. Regardless of what stage your small business is at, there is somebody out there looking to give you money. Hopefully this article shows that there are programs and resources to help you grow your small business. Through small business loans, tapping your friends and family for financial resources, leveraging your small business network and seeking angel investor and venture capitalist, you should be able to find someone to provide the much needed capital to help your business succeed. If you need any additional information, or a little more help in finding the money you need please email us, we'd be happy to help!

What other tips or suggestions do you have on obtaining financing for your business?