A few days ago, I sent you information on using credit to finance your start-up requirements.
Today, I'll tell you what I think of the other 3 financing avenues:
* Debt
* Equity
* Government Grants
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Going into Debt to Finance Your Business
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Debt is just another way of saying "to get a loan".
The loan can be from a bank, or from a friend/family member.
As you know, loans must be re-paid.
This means that a bank will only loan you money if they're pretty darn sure they will get it back. A family member might buy into your dream a little easier - but they still want their money back...
In order to get a bank loan, you need to have a killer idea, a killer business plan to go with it, a good credit score, and a decent relationship with your banker.
** They will check my credit score? **
Yes, these days, the bank will check your personal credit score before giving you a business loan. The reasoning, from their perspective is: "If this guy can't take care of his own money, why
do I think he'll take care of ours?"
The bank will also require that you sign personally for the loan. If your business goes under - they still want their money back...
The SCORE interview with Carl Woodard is a good place to start learning about banks and bank loans.
(This is a full, free interview with a senior business coach from SCORE)
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Financing Your Business With Equity
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When you finance your business with equity, you are basically selling a percentage of your company for a price.
In other words, some investor gives you a certain amount of moolah, and you give them a piece of paper saying they own a part of your company.
Pretty good deal, right?
Yes, it can be.
But there is also a huge downside to equity financing. Namely, that downside is the amount of time and effort it takes to close a round of equity financing.
The primary sources of equity financing are: Venture Capitalists, Angel Investors, and your rich Uncle.
All three of these sources have money for a reason... they know how to make it come back with friends.
This means --> they are extremely picky about the investments they make.
In most cases you not only need a killer idea, and a killer business model, and a killer business plan - but you also usually need a track record of success, or a reference from some influential third party.
99% of those looking for equity financing will never get it. Sad, but true.
If that doesn't deter you, there is also this: you will likely spend 1-3 YEARS chasing equity investment before you land it. This is usually a slow process, and I've personally been involved in
more than one company that went out of business due to lack of operational funds before the equity investment was achieved.
If you decide to pursue VC or Angel money - be prepared to play the game!
The interview with Venture Capitalist Brad Feld is a good place to start playing:
(another full length, free interview)
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Financing Your Business with Grant Money
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Grants are free money from the federal government that you don't have to pay back and you don't have to give away a piece of your business for.
Sounds awesome, right?
It would be awesome... if it existed!
Unless you are a non-profit, into bio-tech, an intermediary lending institution, or a branch of government - you will not qualify for a grant. (Even if you do fall into these categories, you still
probably don't qualify...)
Anybody that tries to sell you grant applications, grant training, etc., is "most likely" a snake-oil salesman. I would run the other way, fast.
While it's a nice dream - getting free money for your business - it just doesn't work that way in the real world. Sorry.
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CONCLUSION
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Knowing what I know about small business financing, I take a different path... When I start a new business, I "bootstrap" it.
I start very small, usually with less than $1,000 and do market research. I figure what the market wants. I "test" the waters with experimental advertising.
I don't put all my eggs in one basket...
Until I find that it can be profitable. THEN, I take all my eggs from elsewhere and consolidate them into my basket (and watch that basket very, very closely).
At the point when I know I can put $1 in advertising into the world, and it will come back with $1.20, $1.50, or $2 - that is when I use credit to expand marketing and sales. After all, how
much money would YOU borrow if you KNEW you could double it?
Food for thought!
Travis