Many great business plans wither on the vine because there needed to be more financing. It may become apparent at some point that there needs to be an infusion of capital to enable it to endeavor to meet its potential. There are different options when seeking financing, and each should be evaluated by their impact on the present and future of the business. We’ve discussed how to court venture capital investors, but there may be other options, such as getting a loan from a family member or friend or working with a bank to get a loan.
Common avenues for raising money
One or more of these may fit the business’s needs:
- Bank loans: Getting a loan or a line of credit takes a lot of time and effort, but banks offer several types of loans, including some through the Small Business Administration. The downside is that the borrower may need to put up collateral.
- Angel investors: Similar to venture capital, high-net-worth individuals loan money in return for an equity stake or some other agreed-upon arrangement. There are pros and cons, such as providing business savvy and contacts, but they may get more involved than the borrower wants. Their goals may be different than the borrower’s.
- Venture capital: These are more like a mutual fund with a pool of investors and can provide a lot of money. They also have expertise and contacts. However, a large infusion of cash may mean the owner loses equity control of the company.
- Crowdfunding: This has been increasingly common in recent years, particularly among millennials. It can be very project-oriented, such as launching a new product. Some may be turned off by involving the public in the details of running a business, and sites often take a percentage.
- Credit cards: This is easy with no one looking at the business plan, but the interest rates can be high. It may be best for small-scale or revolving needs.
- Family and friends: Going into business with a friend or family member puts that relationship at risk, but the bonds can strengthen if it is successful. Interests are often low, and they may act more as a silent partner.
- Bootstraps: Many owners have hit an impasse and put up their own equity rather than involving others. It enables the owner to maintain control and keep the profits. The downside is it puts homes, retirement funds and other assets at risk.
Legal guidance is essential
Smart business owners plan for the future and adjust as needed to achieve their objectives. An experienced legal professional can guide clients in identifying reasonable and unreasonable agreements, offer strategies that avoid legal exposure down the road, and protect the company’s interests if there is a dispute.