When many people start a business, they do so using their own resources and funds. And there can be great wisdom to this … retaining control, a more lucrative exit, etc.
But it also puts your own personal resources on the line, and there are greater risks, as well as possibly a slower build to success and financial stability for the business.
That’s why it’s NOT always a bad idea to seek outside financing, especially when you go about it smartly.
And there are also moments when a small business needs to find financing for a particular growth strategy.
But again — there are smart ways to do this … and not so smart. The local bank is always an option, but they often require a personal guarantee.
The other option is to surrender some equity.
Here are my thoughts on using your company’s equity to raise funds.
Four Non-Bank Options for Small Business Financing
“There are risks and costs to action. But they are far less than the long-range risks of comfortable inaction. – John F. Kennedy
Let me begin by saying that these issues are ones we work on directly with many of our business clients. Small business financing is never an easy topic to discuss, but it can pay off when approached with both eyes open.
So here are some options for you to consider.
1. Investment Companies
You mean those exist for small businesses? Absolutely they do.
And it’s the government who stepped up to offer investment company services for the success of individuals like you and me.
The Small Business Administration (SBA) licenses the initiative, Small Business Investment Companies (SBIC), that provides funding for small companies throughout the country. As it’s grown in popularity, the request for funding has become more competitive. But it’s still worth looking into as you get off the ground and growing.
2. Angel Investors
This form of financing is pretty hard to forecast.
But these kinds of companies and investors usually seek a high return for their “gift” to the early stages of any company or idea. Angel investing differs from Venture Capital Financing, a method we’ll look at in-depth on another day, in that Angel investing might comprise one’s personal funds as a contribution, as opposed to VC that does not.
The Angel Investment Network will provide some simple steps to get started, and will point you in the right direction as far as resources and opportunities to fundraise.
3. Mezzanine Fundraising
The key to Mezzanine Fundraising is “Debt + Equity”.
In this instance, business owners borrow a “mezzanine loan” with the expectation that a business owner will repay the loan, AND offer equity in the business moving forward.
This form of financing is attractive to investors because it goes beyond their loan being repaid – it’s especially helpful if the investor believes in the business to invest more than once, at a later date, than just the beginning stages of business.
4. Royalty Financing
For businesses with a dynamite product, Royalty Financing might be the way to go.
Before this kind of investment takes place, one needs to prove steady sales, over an extended period of time, before the investor will commit. You see this kind of investment on Shark Tank all the time. (Never too late to submit your “my-idea-is-better-than-that” dream).
There you have it – four outside financing options, not including a bank.
And although the financing side of any business is a daunting task, please know that there are people and companies out there who want to support small businesses. It’s just a matter of seeking them out and asking for a little help (which isn’t always a bad thing).
Speaking of help . . . please know that I’m just a call away to start the conversation of growth for your business.
I’m grateful for our chance to serve you and your business — and we are dedicated to its success. Which means that we are willing to help you on the big financial picture, wherever it leads …
Feel free to forward this article to a business associate or client you know who could benefit from our assistance. While these particular articles usually relate to business strategy, as you know, we specialize in tax preparation and planning for families and business owners. And we always make room for referrals from trusted sources like you.
Dickmann Tax Group