Creative Funding Sources
When entrepreneurs start a new business and need funding, they generally first think of banks. Although banks can be excellent sources of capital, there are many other potential funding sources that you should also explore. It is important to note that each type of funding source has its pros and cons and not all funding sources are right for all businesses.
Venture Capital (VC) Firms
VC firms tend to invest in businesses seeking more than $5 million. They also prefer existing companies to start-up ventures. VC money is best for companies experiencing rapid growth, who need a significant infusion of capital. Venture Capitalists also want to “get in and get out” – they do not want a lifetime investment in your business. A 3-5 year exit strategy is ideal, however, 7-9 years is common.
Angel Investors
Angels typically invest between $300,000 to $5 million. They tend to fill the void between venture capitalists and smaller investments made by friends and family. Angel investors can include professionals in your own community such as doctors, lawyers or business executives. Successful entrepreneurs also make good angel investors. Successful entrepreneurs in your industry, however, make excellent angel investors, as they can provide guidance in addition to funding.
Friends & Family
Friends and family members are the #1 source of funding for start-up businesses. Without a proven concept or track record, bank or investor funding can be hard to come by. Friends and family, who know and trust you, may be the best source of funding. These relationships can easily go sour if you are not careful. When accepting money from friends or family, treat the source as you would treat an investor or bank lender. Draw up specific terms for repayment, including a respectable return on investment, and pay your source back on time, every time.
Customers
Customers who are highly interested in your product or service may be willing to lend money or extend favorable payment terms to help you get started. Customer funding often comes in the form of an upfront retainer. For example, a customer may be willing to pay 50% upfront, which may cover your supplier costs. Customer funding possibilities are endless. It is up to you to sell your product aggressively and negotiate favorable terms for your company.
Suppliers
Likewise, your supplier, who stands to gain significantly from your business as it grows, may be willing to invest. Suppliers can lend money outright, or offer favorable terms for accounts receivables.
Competitors
While investments by competitors are surely rare, in some instances, they do work. These investments tend to look more like partnerships, or buy-out scenarios. Together, you may be able to harness specific skill sets from each company and gain larger market share than would be possible as separate entities. Of course, you should be very careful in approaching competitors for funding, as you could tip off others in the industry to your strategic plans.
Terk Consulting, LLC is a business plan preparation company. Call today if you are seeking funding and want to put your best foot forward! 504-962-1511
