Funding for a startup or small business can be one of the biggest challenges any entrepreneur may ever face. Some of the most difficult questions arise when talking about financing; Am I qualified? Do I really need a loan? How much will I have to repay? How can I maintain control if I’m using VC or angel investing? Will I be approved? Is my product unique enough? Though there is no “magic bullet” or “one-size-fits-all” answer, there are many places to find funding for nearly any business or project.
What the SBA has to say:
Here is a brief article from the SBA about considerations for financing a small business.
Before you seek financial assistance, you should thoroughly assess your current financial situation. Ask yourself the following questions to determine your business’ financing needs:
- Do you need more capital or can you manage the existing cash flow?
- If you are having trouble paying your obligations on time, you may need an infusion of working capital.
- What is the nature of your need?
- Do you need money to start or expand your business or as a cushion against risk?
- How urgent is your need?
Whenever possible, it’s better to anticipate your needs rather than looking for money under pressure. It is harder to gain approval for a loan when your company is already in trouble, so plan ahead and secure financing well in advance of a crisis.
- How great are your risks?
- All businesses carry risk, and the degree of risk will affect both the cost of your loan and available financing alternatives.
- In what state of development is your business?
Needs are generally more critical during transitional stages – start-up and expansion being two of the most urgent and costly.
- For what purposes will the capital be used?
The lender will need to know your specific intentions for the money, to assure themselves that your business will thrive and that repayment is assured.
- What is the state of your industry?
Whether your industry is depressed, stable, or quickly-growing will have a distinct effect on your search for funding sources. Businesses that prosper in tough economic times will generally receive better funding terms.
- Is your business seasonal or cyclical?
Seasonal needs for funding are generally short term, and consist of smaller loans with a quicker maturation. Loans advanced for cyclical industries, such as construction, are designed to support a business through depressed periods – these industries are sometimes known as ‘feast and famine’ businesses as the cash flow is often erratic and unpredictable.
- How strong is your management team?
Effective management is an important element of business. Your lender will be looking for a strong managerial presence.
- How does your need for financing mesh with your business plan?
If you don’t yet have a business plan, make it a priority to write one. All lenders will want to see a solid, well thought out business plan for the start-up and growth of your businesses.
The SBA provides a variety of exceptional resources to help companies seeking capital and startup answers.
Family and Friends Loans
The lower your financial risk is, the better off chances you have of succeeding are. Same goes for borrowing money. If you have the ability to borrow from friends or family with a low or no-interest repayment plan, that could be your best bet. Most other types of financing are going to come in the form of equity or debt financing. Being that you will need to exchange equity in your business for financing, or take out a loan against assets or credit.
As with all business, it’s best to communicate as much as possible. If you’re looking to get a loan from family or friends, you may want to get something in writing to help outline the details, repayment plan, expected interest, etc. Here is an Excel tool that can help you calculate and layout a loan repayment plan: Download a Free Loan Calculator Spreadsheet
Traditional Business Lending
There are an abundance of banks and financial institutions to choose from when it comes to business loans. Depending on your needs, there are two fundamental areas for lending. One is a term loan, the other is a line of credit. Cashflow is essential in today’s world, and ensuring consistent stability can mean doom or gloom for some companies. This may be a good reason to seek a business line of credit. If you are looking to make an acquisition of PPE, a term loan may be the way to go, depending on your financial situation and your acquisition needs.
It’s best to talk to one of DeFI’s network companies and have all of your questions answered by an industry professional. DeFI has pre-selected a network of financial companies to work with, specifically Detroit based product businesses, or product based businesses looking to relocate to Detroit.
Venture Capital or Angel Investors
VCs and angel investors are the most well-known forms of equity financing for businesses. This type of funding allows a business to grow by bringing investors on board. There are a few ways to structure these agreements, and how it’s done can be crucial to the future of the business and the founder(s).
An angel investor is a wealthy individual who invests his or her personal capital in a company in exchange for equity in that company. Angels are usually accredited investors, meaning he or she has a net worth of $1 million, or they had an individual income of $200,000 each of the last two years and an expectation of the same for this year, or they and their spouse had a combined income of $300,000.
Venture Capitalists typically reserve additional capital for follow-on investment rounds. This is helpful for companies that have a long runway, or need more time to build out their businesses. Some things to expect when working with VCs: value added investors, productive board members, portfolio benefits, follow on capital, guidance, access to experts, and media exposure. That said, not all VC firms are created equal, nor are all VC firms capable of handling all of these scenarios.
With a VC investment, you will likely have to go through quite a few rounds of presenting and pitching your products. As well, you will likely have to create a board where the VC can help control their investment. Whereas an angel investment may not require as much control in the company.
The newest game in town. Crowd funding is pretty self-explanatory. You are seeking funding for your company or product from many individuals in exchange for something of low-cost to you. Kickstarter is the shining example of the 21st century crowd-funding platform that so many people have heard of. This type of platform allows people with great ideas to share those ideas with the masses, and raise money to create or amplify their project in order to achieve their business goals. Most of these crowd funding platforms do not offer any monetary or equity returns on your investment. Rather, the company may send you a free product or as little as a thank you card for your contribution.
DeFI has a great relationship with the only crowd funding platform in Michigan, Michigan Funders. Michigan Funders give you the opportunity to invest in local companies and see a financial return on that investment if the business is a success. The advantage to working with a crowd funder like Michigan Funders is, you have local people investing that are excited about your products and have financial and social reasons for your company to succeed.