I always like to make a point about “OPM” (or in layperson’s terms, other people’s money) and what it can do for entrepreneurs who want to get a leg up. I’m the first to admit to piecing together this kind of funding when I was building my company. The first was a $10,000 loan from my father-in-law at the time. As business picked up, I was able to secure additional capital, then more capital, then even more capital, and so on. It was really the only option for me.
But here’s something else you should know: OPM comes with strings attached.
As soon as you turn to outside sources of funding for your small businesses, you relinquish some of your control. Timelines might get shorter, visions could become skewed, and there will be a growing folio of people you must answer to.
Overall, with each subsequent round of fundraising, business decisions can become more collective in nature — which potentially dilutes the ownership of your original idea. That means you need to think long and hard about whether to take any type of funding for a small business, especially if control and artistic direction are important to you.
That’s why just as many entrepreneurs choose to bootstrap their companies as those who seek funding from outside sources. It’s all about what you’re looking for.
Funding Options for Your Small Business
If you go the route of applying for small business funding, understand that investors won’t just write you a check. That’s not the way it goes. Investors’ money often comes in the form of amortization, where they divvy up money as needed.
Here’s a personal example: When I invested in a small business (Italian-made sandals, to be exact), I gave the owner a $50,000 ceiling, and we used the money as circumstances dictated. The arrangement has worked out well so far.
When trying to carve out a niche in today’s marketplace, you need to know about the numerous funding options for your small business. Besides bootstrapping your own enterprise, here are just a few options:
1. Commercial lenders: Let’s get the obvious small business funding options out of the way by starting with commercial lenders. Banks and credit unions will gladly provide loans to small business owners. Just know, however, that commercial lenders are rarely (if ever) speculative. What they’re looking for is a solid business plan — not simply an idea for an enterprise. As such, you’ll need to show a reliable history of business revenue and offer collateral to secure the loan, which you’ll need to pay back with interest.
2. Private equity investors: Small businesses in their early stages might have some luck with private equity investors, who often take chances on higher-risk ideas. Apps, software, and technology are the most commonly funded ventures, but products or services in emerging markets also fare well in securing capital through this funding source. However, because you’ll receive an investment, expect to give backers something in return; this is usually business shares or equity positions.
Should you need more than $100,000 (which is the cap for most angel investors), look to venture capitalists. VCs will invest millions into a startup. Micro VCs will as well — just with less funding than a traditional VC.
3. Your personal network: Although this isn’t a frequent source of small business funding, friends and family members are always an option. Should you choose to go this route, make sure you leave nothing to chance. Draw up a formal agreement that outlines the exact nature of the money exchanging hands.
If it’s a loan, detail the repayment plan and whether it will include interest. If it’s an investment, treat it as you would any capital secured from private equity investors. Lay out exactly what the family member will get in return: Should the venture become a success, the gift-giver could have a change of heart and request a stake in your business.
Other Sources of Small Business Funding
With the coronavirus impacting small businesses across the nation, it’s also important to at least mention government relief options. Check out the Small Business Administration’s website for more information on the CARES Act and its associated stimulus plans.
But with the COVID-19 situation in a constant state of flux, you might also want to consider alternatives. Many businesses that can’t operate remotely have opted to launch crowdfunding campaigns to help support their employees. The GoFundMe Small Business Relief Initiative has made microgrants available to small businesses, as well as provided a platform for fundraising activities.
Small business funding can be quite complex. You’ll need to put a tremendous amount of thought in before entering into a financial arrangement with another party. But once you do, that financial support can be critical to getting your business off the ground. And that resulting business relationship is one that should be celebrated. If you’re looking to learn more about potential funding options for your venture or would like me to speak to your organization, fill out the form on my homepage or connect with me on LinkedIn.
3 Funding Sources for Your Small Business
