Entrepreneurial Endeavors: How to Finance a New Business

written by Will Morgan

As entrepreneurs, baby boomers benefit from a more complete understanding of their financial well-being, as opposed to, say, opportunistic college grads seeking a $500,000 loan. And although you may be able to front a larger percentage of funding yourself, chances are you will still need to seek out additional sources of financing to get your business concept off the ground.

Securing funding relies heavily on your business plan – specifically, your capital request, or how large an investment you are seeking from potential financiers. Having a five-year financial outlook consisting of cash flow, balance sheet, and income statements will greatly increase the likelihood of your business being backed. With these as your leverage, it is time to approach financiers, and here your options are diverse.

Financing Choices

While funding can come from any amalgam of different sources, there are several well-traveled paths to consider: venture capitalists, angels, small-business loans, and the three “Fs” (friends, family and the faithful). Other options to research would be government or private grants, especially if you are working to launch a non-profit organization, as well as business competitions (check out the “Planning” section of www.smallbusinessnotes.com for a comprehensive business plan competition directory). A large percentage of business competitions are associated with specific colleges, but many are also state-sponsored or related to certain sectors or companies.

All the above options fall under two categories, equity financing or debt financing, the principal difference being the level of ownership retained. “If you are seeking equity, accept the fact that you will likely lose majority ownership of the business,” notes Karl Baehr, Director of Entrepreneurial Studies at Emerson College in Boston. “If you are seeking debt, you will likely not get the best terms your first time out whether you borrow from an individual or a bank.”

Choice #1: VCs and Angels

Venture capitalists, or VCs, fall under the former category. They literally make a career of finding and backing new business, garnering a profitable return on investment (ROI) for themselves and partial ownership of the company, a factor many entrepreneurs are not comfortable sacrificing. VCs are typically very interested in the tech sector; they congregate heavily in Silicon Valley, seeking out the next Microsoft, eBay, etc. Likewise, they are drawn to projects of a certain major scale, and willingly put up financing in the millions. That is not to say that they would not be interested in a smaller but equally brilliant idea that could still make them rich, but the idea is that the more money they front, the more money they ultimately receive if the business succeeds.

Keep in mind that working with VCs is a process; they will want and need to see all of your financial projections, as well as the startup capital provision and use of funds analysis. Also, it is standard practice to go through series of financing (Series I, Series II, etc.) with VCs as it becomes apparent that your business has potential, but needs additional seed money prior to launch. Despite being time-consuming, this process can be very useful in refining your concept – seeing as VCs have a lot at stake, they can and will offer suggestions to improve your business plan. Baehr emphasizes this element of the VC-entrepreneur relationship. “I would caution you to get more than money from the transaction,” he says. “Maybe your investor can bring in clients, or fill needs in your organization.” Angels are somewhat akin to VCs, except they tend to be simply wealthy individuals as opposed to career financiers. The motions of securing funding, however, are for the most part similar.

Choice #2: Bank Loans

Other new business owners, however, may wish to retain complete ownership of their venture and choose instead to seek debt financing in the form of a small business loan, a direction that has become increasingly more common, as Baehr points out. “Where banks, not too long ago, were not a first stop for new businesses, several banks are now offering programs for startups,” he says. Banks can suggest various different loans depending on your needs – startup capital, debt refinancing, inventory purchases, etc. Baehr, however, warns against the emerging trend of “micro loans,” or smaller loans for startups. “The single biggest problem is not knowing how much [money] you really need, securing too little, and burning through it too quickly,” he says. “Know how much you need, and know what you're going to do with it.” The salient features with loans are your credit status, the loan's term length, and the repayment conditions; these should be based on how quickly you project to break even and thus have funds available to pay off your loan.

Choice #3: The Three "Fs"

If VCs are unresponsive and you do not want to deal with banks, friends, family and the faithful might be a better option. Be wary though - while it may seem like the easiest choice, a business relationship with those closest to you can be the most difficult to maintain. “If you go to the FFF well, manage it like you would a bank loan or any investor,” recommends Baehr. “Don't let taking money potentially ruin a lifelong relationship.” You can assure that those who are willing to help financially understand the risks involved and what they will be getting in return by maintaining a professional approach. “Manage the relationship as if it is with an outside investor,” says Baehr. “Schedule payment of debt, and stick to it. Remember that they risked money believing in you. Be respectful of that and conduct yourself as if you just received those funds from a venture capitalist.” If you can safely come to a fair agreement and establish a working framework, then the three 'Fs' can be a good method for bypassing the bureaucracy of VCs, angels and loans.

Where To Begin

A great place to start when seeking to fund a new venture is www.sba.gov, the site for the United States Small Business Administration, which offers informational and financial programs and services for getting your business off the ground. Baehr recommends visiting the business development office in your city to find specific information for funding sources in your area. He also advises entrepreneurs to secure the services of a lawyer and accountant to help navigate the process.

Bookshelf:

Resources for finalizing your business concept and successfully approaching potential investors:

Best Home Businesses for People 50+ by Paul and Sarah Edwards, Tarcher, 2004

Every Business Needs an Angel: Getting the Money You Need to Make Your Business Grow by John May and Cal Simons, Crown Business, 2001

Pitching to Venture Capitalists: Essential Strategies for Approaching VCs, Entering Into Negotiations and Securing Funding by Patrick J. Ennis, Aspatore Books, 2004

Fundamentals of Investing by Lawrence J. Gitman and Michael D. Joehnk, Addison Welsey, 2006

The Entrepreneur's Guide to Finance & Business by Steven Rogers, McGraw-Hill, 2002