Choosing among the many possible sources of financing may be as simple as going with the only option that will take you. Ideally, you'll have a choice of several options. And at least to start with, you should have a good idea what would be your preferred form of financing so you can go after the most comfortable choices first.
Your options will be dictated by several considerations, including how much money you need, how long you'll need it, what you'll need it for, and how much control you're willing to relinquish. For instance, if you need to raise several million dollars, then venture capital, a stock offering or perhaps a well-heeled angel investor will be your best bet. On the other hand, if you need only $10,000, one of the SBA's Microloans may be your best bet. Financing lasting more than a few years is usually going to come from equity investors such as venture capitalists, angels or friends and family, unless you are financing real estate, when a bank loan would be suitable.
The reason you need the money will also come into play. A bank is unlikely to lend you money to allow you to increase your salary--that is going to have to come from someone with personal interests, such as an angel or family member. That same family member, on the other hand, will be unable to help if what you need is an international letter of credit to wrap up an across-the-border deal. Matching your financing source to your need will eliminate many possibilities. Control is another issue. If you want to maintain maximum control of the business, stick to family, friends and bank financing. Angels, venture capitalists and public markets are much more likely to want to see themselves or their hand-picked henchmen in the driver's seat.
Who Wants What
Not all investors and lenders are looking for the same thing. Some are interested in preserving capital and generating interest income, while others are willing to risk everything for a shot at great wealth. Knowing what financing sources want can make the difference between getting financing and having to do without.
Bankers are looking for interest income from a loan, along with a high likelihood that the loan will be repaid. They don't want to control the business other than making sure it meets loan convenant standards, and they take collateral in lieu of repayment only as a last resort.
Venture capitalists want very high rates of return, usually through a sale of the company to another firm or the public via a stock offering. They usually want to have lots of input into how the business is run because they're willing to take risks others avoid.
Angel investors vary widely, but they are typically willing to accept risk and demand little or no control in return for the chance to own a piece of a business that may be valuable someday.
Family and friends may be motivated more by personal concerns, such as showing that they care for the small-business owner, than by financial issues. They often fail to appreciate either risks or potential returns. They may ask for no control but later demand it if things go sour.
Estimating How Much You Need
When you started your business, you had to estimate the amount you needed to get going by combining your personal living expenses with startup costs and outlays required to keep the business running. It's easier now because presumably all you have to worry about are ongoing expenses and expansion costs.
Thoroughness and caution are the keys to making a useful calculation of how much you'll need to expand. Use the work sheet on page 86 to figure out how much you'll need. To start, list all expenses related to running your business, as well as expanding it, in one column of a ledger pad or spreadsheet. Then add two more columns, labeled expansion costs and ongoing costs. In a separate area, place two lines labeled estimated income and other sources of funds.
Add up expenses projected for the coming year, including expansion and ongoing costs in the subtotals and total expenses lines. Put your estimated net income for the coming year in the estimated income line. Place the total of other sources of funds, such as savings and loans, in the other line and add these two together. Now subtract the total expenses from this amount. If the number is negative, this represents approximately how much financing you will need to pay for expansion.
There are many places to look for financing for your growing company. You can look to the same sources that helped you start your business or tap savings, profits, friends and family, banks, venture capitalists, or the stock market. Whatever you do, you'll find it a lot easier to fund a growing company--and grow a company that is well-financed.
The SBA section was excerpted from "SBA Loans for Your Startup" by Asheesh Advani.