I Need Money!

     The fourth step according to the Small Business Administration is getting financing for your business. This step, however seems to be the biggest challenge for most entrepreneurs and the hesitation or fear of getting through this step will certainly bring any venture to a halt.
     Truth is, every business needs money to make money so financing is a must. Much advice and research is needed prior to launching any business, so the proper homework is needed in order to obtain a source of capital.  The first question that needs to be asked is what is the money for?
     Your written business plan should give a rough idea as to what exactly is needed. Are you trying to raise capital for costs of starting, or just to cushion against the risk of failure? Are you looking ahead for needs expected in six months, one year, or three years down the road? Most sources indicate that planning for expenses ahead of time is much more effective than trying to find money while under pressure.
     The obvious expenses occur after planning step three (posted September 26th) looking at overhead, and cost of operation. Is money needed for property, inventory, or employees? Is there a need to borrow for innovation, research, or expansion? Is your business seasonal or cyclical? What about the strength of the business? Are you planning to open a franchise, or nation-wide chain? How is the competition factor? Will the guy down the road force you to close your door early? All of these factors and more lead to the type of financing an entrepreneur will need.
     Basically, there are two types of financing; equity financing and debt financing. Both are useful for different applications and both will serve a business's needs is used correctly.  Here is where research is needed. Try going to a bank and request a loan or a venture capitalist without a plan and you will certainly be rejected.

     Equity financing is used when money is raised by an outside entity in exchange for a share of your company. An example is an angel investor. This type of investor will use his/her personal assets to fund your need in exchange for a percentage of the growth of the company. A venture capitalist is a company that manages a money fund that will be used for investing. Both types of investors will require a proper business plan as well as a level of experience before getting involved. Angel investors usually provide help with funding from $5000 to $500,000. Anything in excess would require a venture capitalist. However, most VC's will want your business to be up and running for at least 3-5 years before offering to help.
     Debt financing is found from banks, credit unions, commercial finance lenders, or micro-finance lenders. These types of loans can be short term, or long term and may or may not be backed by the Small Business Administration. For the most part, debt financing will require having between 20-40% of individual contribution put in the business prior to securing a loan. Organizations will look at factors including experience in business management, background information such as a resume, a credit report, tax returns, financial statements, as well as all legal structural documentation. Most lending institutions will also require some type of collateral prior to risking any capital on your idea.
    The popularity of micro-lending has increased particularly for minorities in small business. Microloans are used for entrepreneurs who can not raise any capital due to living in poverty. These types of loans are generated by collecting pools of money from investors who wish to support the concept of entrepreneurship in general. Usually several investors contribute small amounts of money to an organization which will lend to a small business owner after that person has passed a financial responsibility test. A popular micro-lending organization is kiva.org.
     Of course there are numerous other places a business owner can raise capital, but again a plan is needed. Whether you plan on selling shares to angel investors or venture capitalists, or simply borrow the funding needed to start, be sure to anticipate what the growth rate for your business looks like. Having a balance sheet marking your assets and liabilities, or a profit/loss comparison sheet is a must. It is always better to plan and fail before failing to plan!