Once you’ve run your hurdle race, it’s time to decide where to go to seek funding. Sometimes, it takes more than once source if some of the hurdles from the first step are too high. Many clients use more than one source for loans. And that’s the secret to funding we want to share with you.
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Secret Sources of Funding for Jackie
Since Jackie was looking to build a business that she wanted to keep for the long-term, we wanted to ensure she kept as much control as possible. Once we cleaned up the financials and the business plan, we then had to choose how best to get her the capital she needed. Before we get what we did, we need to take a bit of a detour through the different funding options available.
Main Funding Options for Small Business
These are of the most common and most successful funding options:
No matter whatever source you use, all will be looking for some degree of bootstrapping. All investors or capital sources will want to ensure that you have some ‘skin in the game’. Having your own capital at risk increases the likelihood that you will follow through. Funds can come from personal savings, loans, avoiding wasting money, etc. However, BEFORE you do ANY self-funding, make sure that you set up a legal structure for your business first. You can invest your money in the business. However, you need to separate your personal assets from the business. It protects your personal assets from creditors.
Friends & Family
This is a typical step for many. These are typically micro-loans of $5 – $15,000. It can also be a difficult step for many as well. Unless your family member or friend has a specific skill set that will help the business succeed, you probably better off to set up any investment as a short-term loan than selling equity. This is for two reasons. First, it avoids entanglements when it comes to decision making. Second, if things go south, creditors are in a preferred position to equity holders in case of a liquidation of assets.
Grants & Governmental Funding
These funding sources aren’t a secret, but they are often overlooked. The SBA provides special treatment for Women & Minority-Owned Businesses. Under the Obama administration, LGBTQ owned organizations were covered as well, but this seems to have all but disappeared in the Trump era. Hopefully, this will be rectified in 2021. There are also community grants and development zones. You should check with your local and state governmental agencies to see if you qualify.
Lenders come in multiple varieties. We covered the whole lending ecosystem in a prior post, so we won’t go into it in detail here. We will just share this rule of thumb. Unless your personal credit score is over 700, avoid commercial banks. If your score is between 620 and 700, alternative lenders are an option. If your score is below 600, you may be better off fixing your score first before seeking funding.
Angel investors are dedicated to investing in start-ups and small businesses for financial gain. They will look for investments that will return a certain percentage over a fixed period of time, usually between 3 and 5 years. These investments will be made in exchange for a share of ownership in the company. Therefore, it is important to make sure they have a similar vision for the business as you do. Of the equity groups, Angel investors tend to be more open to conversation and persuasion as they are generally individuals or a small group of individuals. They may be more willing to support businesses where they have a personal passion.
VC firms are more formal than Angel investors, and they tend to be more discriminating in their investment choices. Here, you will need to have all the ‘I’s dotted and ‘t’s crossed in order to have a shot. While they may be tougher, they do come with a degree of business savvy and knowhow that can be very helpful if applied correctly to the business. As with Angels, you are giving up some control of the business, and therefore, you need to make sure there is a good fit between your vision and theirs.
Lastly, there’s crowdfunding. Crowdfunding is where you make your concept available to the public. You can ask for donations, or you can provide some fractional share of the company for a certain amount. Success in crowdfunding rests on your shoulders. If you have a compelling story, and you are willing to push it via social media channels, this can be somewhat effective. It’s a slower process, as you are raising money in small increments, and you are competing for people’s attention constantly.
Now, Back to Jackie
Ok, if you stuck with me this long, thank you! Since Jackie wanted to retain control, we could eliminate Angels, VCs, and Equity Crowdfunding. Jackie was funding a women-owned business, so she did qualify for some not-so-secret governmental assistance. She also had a good credit score, but not enough to go to the commercial banks. Therefore, we crafted the following strategy for her.
First, Jackie had a few family members, who were interested in investing in her venture. We were able to set these up as low-interest short-term loans. Second, we were able to secure some local government funding for her business, and she was able to secure some local government contracts as her first customers. We sourced the remaining capital needs from two lenders. The first lender was Kiva. It’s a zero-interest crowd-sourced loan geared mainly to underserved groups. The other was through an alternative lending source that provided preferential rates to women-owned businesses.
By leveraging all these sources, we were able to achieve her fundraising needs, while allowing her to retain 100% control of her business. Plus, she had the added bonus of a guaranteed first sale through the local government contract.
With all of these funding secrets, come back next time for even more information.