6 Ways On How to Get Your Business Funded


Despite what some people think, beautiful, well evidenced, well crafted business plans DO NOT generate business financing. Yes, there are many kinds of financing options which require a well put together business plan - which some may fall for - but the investors which add value need more than just a business plan.



Business Plan Myths


So what do investors look for in a business plan? Typically, investors are looking for a business plan which communicates ideas and information, but they also invest in a company, product and the people (more importantly, their skills & credentials).


Business plans sell investors. Actually, they don’t—a well-written and convincing business plan (and pitch) can sell investors on your business idea, but you’re also going to have convince those investors that you are worth investing in. When it comes to investment, it’s as much about whether you’re the right person to run your business as it is about the viability of your business idea.


I’m not saying you shouldn’t have a business plan. You should. Your business plan is an essential piece of the funding puzzle, explaining exactly how much money you need, and where it’s going to go, and how long it will take you to earn it back. Everyone you talk to is going to expect to see your business plan.


But, depending on what kind of business you have and what your market opportunities are, you should tailor your funding search and your approach. Don’t waste your time looking for the wrong kind of financing.



Small Business Financing Myths





The process of looking for money must match the needs of the company. Where you look for money, and how you look for money, depends on your company and the kind of money you need. There is an enormous difference, for example, between a high-growth internet-related company looking for second-round venture funding and a local retail store looking to finance a second location.


Venture Capital (VC)


Venture Capital is a growing opportunity for funding businesses. Actually, VC is very rare. The business of venture capital is frequently misunderstood. Many start-up companies resent venture capital companies for failing to invest in new ventures or risky ventures. People talk about venture capitalists as sharks—because of their supposedly predatory business practices, or sheep—because they supposedly think like a flock, all wanting the same kinds of deals. This is not usually the case, although there are some of this ilk...as we all find anywhere and everywhere. The bottom-line is that venture capital is a business; they're interested in ROI on the people's money that they may be investing in YOU and your business. They have a professional responsibility to reduce risk as much as possible. 



All this being said, Venture Capital shouldn't be used for many startup businesses. This is because they can't afford to invest in startups unless there is a rare combination of product opportunity, market opportunity, and proven management credentials - and most startups ONLY have market opportunity right now - Venture Capitalists know this leading to the phrase "don't bullshit a bullshitter". 


If you have to ask whether your new company is a possible venture capital opportunity, it probably isn’t. People in new growth industries, multimedia communications, biotechnology, blockchain, or the far reaches of high-technology products, generally know about venture capital and venture capital opportunities.


Bank Loans

 

Bank loans are the most likely option for funding new businesses. Why then do I say that banks are the most likely source of small business financing? Because small business owners regularly borrow from banks. What qualifies them is if their business has been around for a few years generates enough stability and assets to serve as collateral. Banks commonly make loans to small businesses backed by the company’s inventory, assets held or accounts receivable. Normally there are formulas that determine how much can be loaned, depending on how much is in inventory and in accounts receivable.

A great deal of small business financing is accomplished through bank loans based on the business owner’s personal collateral, such as home ownership. Some would say that home equity is the greatest source of small business financing.  


Angel Investors


Many companies are financed by smaller investors in what is called “private placement.” In some areas, there are groups of potential investors who meet occasionally to hear proposals while there are also wealthy individuals who occasionally invest in new companies. In the lore of business start-ups, groups of investors are often referred to as “doctors and dentists,” and individual investors are often called “angels.” Many entrepreneurs turn to friends and family for investment (covered later).

Your next question of course is how to find the “doctors, dentists, and angels” that might want to invest in your business. Some government agencies, business development centers, business incubators, and similar organizations that will be tied into the investment communities in your area. Turn first to local small business development groups.


You can also post your business plan on sites that bring angel investors together. The two most reputable sites in this area are: 

Guest Angel Network

Angel Investment Network



Top Tip: Be careful dealing with anyone who offers to help you find financing as a service for money. These are shark-infested waters. Some are legitimate providers of business plan consulting, but legitimate providers are harder to find than the sharks.


Commercial Lenders




Banks are supposedly even less likely than venture capitalists to invest in your business, or loan money to startup businesses. However, we have found that they are actually one of the most likely to invest, partly due to the way financial markets are working right now, quantitative easing and various other variables at play.


Many governments prevent banks from investing in businesses with the excuse being that society, in general, doesn't want banks savings from depositors going into 'risky' business ventures as obviously when it goes wrong the depositors aren't to happy - despite there being many ways around this and banks typically using money for other nefarious purposes.


So why then do I say that banks are the most likely source of small business financing? Because small business owners borrow from banks. A business that has been around for a few years generates enough stability and assets to serve as collateral. Banks commonly make loans to small businesses backed by the company’s inventory or accounts receivable. Normally there are formulas that determine how much can be loaned, depending on how much is in inventory and in accounts receivable. 

A great deal of small business financing is accomplished through bank loans based on the business owner’s personal collateral, such as home ownership. Some would say that home equity is the greatest source of small business financing.


Other Lenders




So aside from all the above, an established small business can also turn to accounts receivable specialists to borrow against it's current business deals.


The most common accounts receivable financing is used to support cash flow when working capital is hung up in accounts receivable. As an example, if your business sells to distributors that take 60 days to pay, and the outstanding invoices waiting for payment (but not late) come to $50,000, your company can probably borrow more than $25,000. Interest rates and fees may be relatively high, but no where near the level of credit cards/wonga and options of that ilk. In most cases, the lender doesn’t take the risk of payment—if your customer doesn’t pay you, you have to pay the money back anyhow. These lenders will often review your accounts/debtors, and choose to finance some or all of the invoices outstanding.

Another related business practice is called factoring. So-called factors actually purchase obligations, so if a customer owes you $100,000 you can sell the related paperwork to the factor for some percentage of the total amount. In this case, the factor takes the risk of payment, so discounts are obviously quite steep. Ask your banker for additional information about factoring. 


Friends & Family Funding



This is probably most people's least favorite option and in most cases with good reason! However, there are some advantages that we feel necessary to point out as you could be one of the few that has this as their best option. Don’t take private placement, angels, friends and family as good sources of investment capital just because they are described here or taken seriously in some other source of information. Some investors are a good source of capital, and some aren’t. These less established sources of investment should be handled with extreme caution. 

Never, never spend somebody else’s money without first doing the legal work properly. Have the papers done by professionals, and make sure they’re signed.  Never, never spend money that has been promised but not delivered. Often companies get investment commitments and contract for expenses, and then the investment falls through. Avoid turning to friends and family for investment. The worst possible time to not have the support of friends and family is when your business is in trouble. You risk losing friends, family, and your business at the same time. 



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