Fund the Runway

March 5th, 2009 by Sharon Larsen

Today we begin discussing the funding options when you’re starting a business.

 

 

There are a variety of methods you can pursue when funding your venture. I’ve seen associates use each of these methods, and I have used a number of them myself. It is interesting to note that I’ve experienced and seen both success and failure on each of these tracks. In many cases, the type of venture you embark on determines the type of funding you’ll need. Lengthy technology buildups take venture capital; but family businesses can be kick started with family funds, and quick-to-cash service businesses can be bootstrapped.

 

I’ll set forth several alternatives and discuss the pros and cons of each. There is no right or wrong answer on how to fund a company. It frequently depends on your present financial circumstances, what type of business it is, and your preference. Of course, I prefer to bootstrap, and my bias will come out—but remember to consider your specific situation.

 

Potential Funding Sources:

§  Debt Financing

§  Credit Cards

§  Bootstrapping

§  Friends and Family

§  Angels and Snakes

 

#1 Debt Financing

 

Debt financing is a classic: simply get a loan from your local bank. Banks require collateral. Often, they choose to tie up your house. This may not be a bad option if you have equity in your home and don’t mind losing it if things fail. Of course, you want your venture to be successful, but if you put something on the line, you must be emotionally prepared to lose it. Don’t risk what you can’t afford—and really, truly don’t want—to lose.

               

I’m sure that debt financing has its place, but I hate it because I have to go sit in front of some stodgy banker who pretends that he understands what I am setting out to do. I remember one business I created that required a line of credit. The business was growing so fast that I needed gas to fuel the rapid growth. Online sales was our model; I would get paid thirty days after the end of the month, but I had to pay for the advertising up front.

 

At one point during the term of the line of credit, the bank called me in for a formal discussion about their little $100,000 loan. They proceeded to express concerns. I proceeded to erupt into laughter. See, their biggest concern was that I had only one company paying me. Banks are used to seeing businesses collect only from most of their customers most of the time. To them, it looked like I had all of my eggs in one basket. They were right, it was only one company—but it was Google! After an hour of attempting to explain the business model to them, the president finally came in and vouched for me. Forty pages of terms and conditions later, I had received my line of credit. Needless to say, we never missed getting paid by Google.

 

So what was the value of that debt financing? Well, I did not have to give up ownership in the company, and I instantly had funds to draw on for uninterrupted business growth. Outside of calculating the risk, the cost of such capital is very low. If you choose debt financing to fund your company, use a Small Business Loan (SBA). Interest rates are nominal, and these loans are fairly easy to obtain with a structured business plan. Of course, you have to provide a personal guarantee (in the form of collateral) and are obligated to make payments on the loan. If things go wrong, there is a chance you could end up paying for a dead dog.

 

Pros:

§  SBAs are relatively easy to obtain.

§  You maintain ownership.

§  There is a low initial cost.

 

Cons:

§  You have ultimate responsibility to pay back the loan with or without success.

§  The loan requires material and emotional collateral.

§  You account to a banker who may or may not know your market.

 

 

We’ll begin next time with discussing credit cards as a means to fund your small business.

 

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