Funding your company with personal assets is ideal for maintaining control but it can stall growth—and jeopardize your financial future—if your pockets aren’t deep. Still, anteing up a nice chunk of change boosts your credibility with prospective lenders and investors—you’re a greater risk if you’re not willing to put your own money on the line. Together, my partner and I kicked in a third of our $90,000 start-up capital.
Family and Friends
The initial funding for start-ups is commonly called the “friends and family” round. Tapping loved ones for funding is as common as it is dicey. If it turns out well, life is good. If it doesn’t, lifelong relationships can turn sour. Treat these loans like the serious business agreements they are. Present your case as if your relatives were bankers: Quote a competitive interest rate and payback terms, explain the risks.
But for heaven’s sake, don’t let zeal override common sense. If grandma can’t afford to lose her entire investment, tell her thank you and politely decline. A shoebox full of twenties isn’t the only way to lend support. Both Don’s parents and my parents showed faith in us by personally guaranteeing our startup bank loan
It’s all about collateral. Don’t expect a bank to hand you a check until enough assets are pledged to cover the full amount of the loan, and then some. We had family guarantees, second positions on our homes, and secured business assets like equipment and inventory. It still took ten banks to find one willing to cut us a check.
The Small Business Administration
Turned down by a bank? The U.S. Small Business Administration (SBA), an independent agency of the federal government, also administers loans. Its partners— lenders, community development organizations—make the loans that the SBA guarantees. The agency’s loans typically require lower down payments and offer better terms than banks, but the lending criteria is just as demanding. Applicants must pony up personal assets (around 30 percent of the capital loan) and have a healthy debt-to-net-worth ratio and a sparkling credit history.
The owner must also be active in day-to-day affairs, put up the same collateral a bank would demand, and prove that cash flow is strong enough to meet his obligations. That said, the SBA is likely to green-light a loan if the only red flag is insufficient collateral, whereas a bank would ding you for it.
Yes, there are angels among us, and they usually flutter up after you’ve gone through your “family and friends” round of financing. But their heavenly cash often comes with a helluva price—and I speak as an angel investor. It’s a classic supply and-demand scenario. In most industries, at most points in the business cycle, there are fewer angel investors than entrepreneurs in need of them (Big exception: the Internet and wireless spaces in the early twenty-first century). Some angels’ motives lean more toward mentoring and the joy of business building than simply inflating their net worth. Other angels exploit their leverage by imposing turnip bleeding terms and draconian exit strategies. An angel may say, “My $100,000 investment would bring the value of your company up to $200,000, so I would own 50 percent of the business.
After the angels, who often fly solo with smaller bundles of cash under their wings, venture capitalists swoop in with “institutional” money. Their ranks include former entrepreneurs who offer contacts and expertise ranging from operations to finance to the particulars of the space in which you’re planting your flag.
VCs, as they’re called, try to squeeze even more favorable terms out of new companies than most angels. Like angels, VCs expect a return on their money in roughly five years. Many start-ups don’t interest venture capitalists because they don’t meet typical VC criteria—seasoned management, untapped niches in high-risk industries, potential for a financial grand slam.
Taking part in accelerator programs in another great option to consider. For example, the company Newchip offers access to $ 1 000 000 free credits. The extra value of being part of the accelerator program is that you will get access to software, to industry knowledge, access to investors. Check Newchip Accelerator Reviews for more information.