It’s a complex process that involves uncovering sources of money, using the proper means and evaluating whether the timing is good. If the economy is slow, it’s more difficult to raise cash — no matter how clever your business plan is.
There are several ways to initially fill your coffers including personal funds, cash injections from family and friends, loans, venture capital firms that specialize in financing new businesses and wealthy angel investors who have no institutional affiliation.
Because the process is complicated, consult with your legal adviser before embarking on a funding search to ensure that any deals are made in your best interest.
A major consideration is the amount of control you keep in the company. After all, it’s your idea and you don’t want to lose ownership.
Here’s a quick rundown of the major sources of start-up financing and how they can affect the owners of a new business:
Scratching Up Seed Money
Personal funds: This is the most common source and is often preferred at the outset because it lets you and your co-founders keep control of the company. Most importantly, however, it shows your commitment, which can help you develop a strong position for later venture capital financing. Another advantage of using your own cash is that it gets you into business faster, without the delays that can accompany efforts to attract outside capital. One source of financing is the cash value of whole life insurance policies you’ve taken out over the years. If these policies have been in force for any period of time, you may have accumulated a considerable cash surrender value that you can borrow against.
Venture capital: If the terms are reasonable and acceptable, this could be a good source of money. Difficult negotiations include the terms of your control over the company and the return that venture capitalists expect from their investment. Some investors may insist on taking an active role in strategic planning and company operations. Get a financial adviser involved in these negotiations, particularly when bargaining power may not be equal on both sides of the table.
Friends and angels: This is one way to get some good terms from a financing arrangement, but be wary of unrealistic expectations. Friends, relatives and angel investors may be unsophisticated and have unbalanced portfolios, and that can lead to friction down the road. They tend to become more vocal and intrusive during the volatile ups and downs that accompany most start-up companies. And money from them is also likely to be a one-shot deal, with little chance for boosting the investment later.
Other sources: Of course, there are loans from banks and the Small Business Administration and you should investigate any programs at state financing agencies. Sometimes, you can find other companies that may be willing to finance the development of a product in exchange for some interest in it or possibly acquiring it at some point. Former employers or industry peers might also be tapped in this way.
The rest of the process: Of course, digging up the initial capital isn’t the end of the story. You want to determine what the best means is for acquiring the money by choosing between stock offerings, loans, mezzanine financing, and the like. And the economic climate has a significant effect on how you raise money, how much you get, and how fast you grow.
Get legal advice before you even begin the process and continue consultations to ensure you get the best deal with the best terms. For example, proper guidance can help minimize your tax bill and bring you through a successful initial public offering when the time is right.
Finding and signing the right deal takes good planning. The success of your venture and continued control over the business is at stake.