Alternative funding series brought to you by Verifico.
Attempting to find financing for your startup can be confusing even discouraging, if you don’t have knowledge of your options. There are numerous routes you can take in both the Private Equity and Debt Financing worlds. It is essential to be knowledgeable about all of the options and to weigh the pros and cons of each before making a decision. Listed below are six common sources of funding, a brief explanation of each, and the benefits and hesitations associated with the different methods.
Small Business Administration (SBA) Loans
The SBA is a government administration dedicated to helping small businesses succeed. The four primary functions of the SBA are:
1. Helping small businesses obtain capital (the SBA does not actually lend, but in some cases, it will act as the guarantor on loans for small businesses) 2. Entrepreneurial Development through education, advisement and training
3. Ensuring that 23% of government contracts are awarded to small businesses
4. Advocacy for small businesses
Pro: Proper treatment of an SBA loan will increase your chances of receiving a bank loan.
Pro: The SBA acts to improve the relationship between local lenders and local borrowers.
Con: There are strict guidelines; the SBA looks at data from the previous 2-3 years, most commonly from the worst of those years, so it is difficult for very young companies to obtain one.
Angel Investors
Angel investors are wealthy individuals who will give an entrepreneur financing in exchange for a share of equity in the company. Investment sizes range, but usually are less than $1 Million. Angels often times work in organized groups that screen deals and invest with each other, while many invest on their own. Angel investors are more serious than the type of investor you would find in a Friends and Family Round, but they are usually less serious than a VC Firm.
Pro: Angels normally have experience in the industry and can offer helpful guidance and introductions to their network. Pro: Because angels are less rigid than VC Firms, flexible business agreements are common.
Con: You can be forced to give up some degree of control over your company. Due to the high-risk nature of angel investing, angels rarely make follow-on investments.
Friends and Family
As an entrepreneur, you can lobby friends, family, and associates for funding that is usually invested more because of your personal relationship rather than an accurate assessment of the business plan. The Friends and Family Round often acts as a seed investment to get the business to a point where it will be able to obtain larger funding from an Angels or VCs.
Pro: Funding is usually obtainable quickly due to your existing relationship.
Pro: Potential exists for the mutual vested interest in the business to bring you closer with loved ones.
Pro: The investment terms are usually more flexible and potential exists for numerous equity or pay back methods.
Con: Immense pressure to succeed can strain personal relationships.
Con: Friends and family frequently have an extremely limited ability to evaluate the potential of your business, though they tend to give advice because of their monetary stake in the company.
Con: Friends and family usually bring nothing more to the table as an investor besides the initial capital.
Venture Capital (VC) Funding
Many entrepreneurs think that VC Funding is the key to their success. Venture capitalists are investors who are willing to put forward a large sum of money in exchange for equity in the company, but who only get their money out once the business either is acquired by another company or goes public. VCs are professional investors that are all about the money. They normally look for investments that can provide a 6X return on their investment, so you better be prepared to go big!
Pro: VCs can invest large sums at once and they can provide expertise and other assistance that is helpful in growing and exiting your business.
Pro: Being VC funded brings instant credibility to your company.
Pro: VCs open up doors to a vast network of individuals including partners and future investors.
Con: The term “Vulture Capitalist” exists for a reason. VCs are about the money and will take necessary steps to see a return on their investment, including ousting you from your own company.
Con: VCs may steer the business in a direction that you don’t agree with. However, they are very experienced and may know something that you don’t.
Bank Financing
Bank loans are the most frequently sought after source of financing and can be pursued at your nearest lending institution. Bank financing can be tricky as there are many different types of financing options and interest rates to go along with them. It is imperative to educate yourself about the process and your options before beginning.
Pro: Banks offer a range of funding amounts and payback options to fit your needs.
Pro: If you qualify, the time to funding is usually fairly quick.
Pro: If you go the financing route, you do not have to give up equity in the company.
Con: Bank loans are very difficult to obtain and the criteria is constantly changing.
Con: The entrepreneur owes the borrowed money whether the company succeeds or not.
Con: The large amount of documentation required can be tedious and time consuming.
Con: The financing options can be confusing. If you lack the knowledge or experience, you may lock yourself into an unfavorable deal with poor payment terms.
Utilizing Financial Professionals via Verifico.com
Verifico is a one-of-a-kind online marketplace where you can search and connect with financial professionals that help you navigate the financial landscape and secure bank financing.
Pro: Verifico’s Six-Step Verification process eliminates the chance of encountering fraudulent consultants.
Pro: The platform streamlines the funding process which makes it possible to receive financing without ever setting foot in a bank or leaving your office.
Pro: The financial professionals lay out the funding criteria beforehand so you only apply for financing that you are likely to receive.
Pro: The financial professionals use their knowledge and experience to position your company in a way that is most appealing to the lender.
Pro: You only pay the financial professional for their service IF and WHEN you receive funding.
Con: Upon receiving funding, you must pay a small percentage to the financial professional for his or her service.
Con: You are not in direct contact with your lending institution (however this isn’t always a bad thing).
The options and facts have been laid out. Each option has its advantages and disadvantages which, depending on your situation, will carry more weight than others. No matter which route you choose, the key is to be educated in all areas as you will most likely use each one of options during your career as an entrepreneur.
