Funding Your Enterprise

As an entrepreneur who’s about to start their own enterprise or wishing to grow it, a financial plan, which includes funding for the business, is a critical step and a required element of the business plan. There is no question that missteps in your financing can stop you cold. Waiting until you require funds to plan for and solicit funds for each stage of the business may leave you in a cash flow shortage, which in turn may delay or even shut down your enterprise.

Start raising funds as early as possible since the process could take a minimum of 6-9 months. So, if you have enough to keep you going for a year then you need to start raising three months from now. You may get dozens of rejections before you find an investor that is interested in your business/industry and wants to invest. The due diligence alone takes months, so make sure you have enough funds before you embark on this journey to avoid later having to accept any deal just to be able to survive.

On the other hand, try and get by on as little funding as you can and based on what you really require because searching for capital that you don’t absolutely require can consume valuable time that may be better spent building the business.

If you are looking for business startup funding, consider how you might scale back your small business idea or break it into parts, so you can get your new business up and running without a large infusion of small business funding. This is a balancing act: limiting your growth too much by not having enough funds or limiting your growth by not spending enough time on your enterprise. The bottom line is that the more history and positive results you have been able to achieve, the easier it will be to get a loan. Also, the more developed the enterprise, the fewer shares in your company you should need to give up for equity funding.

Judge what you really need to grow a successful business. If you ask for too little your funding sources may think you don’t believe your enterprise has the growth potential or intend to keep it small. On the other hand, if you ask for an unrealistically high amount, you may turn them off even if they like the business idea.

For enterprises that need to raise capital, there are a lot of options they can choose from, but there is no question that raising money is hard. It doesn’t happen overnight. Pitching to friends and family, selling a product before it exists, figuring out which of your friends or LinkedIn connections knows a VC, then eventually pitching to that VC (if you can even get the meeting), determining which bank gives fair-termed loans and even what terms are fair are all difficult.

To research the funding options available a simple internet search using words like ‘funding’ or ‘financing’ ‘small’ or’ start up businesses’ or ‘enterprises in Canada’ should provide you with a wealth of information on the subject that I may not cover in this chapter.

While many new small businesses are financed out of their owners’ pockets at the beginning, at some point they will need money from other sources to continue. There are several financing options for an enterprise, and they all require information about you and your business idea. The needs of each of the funding sources differ and the closer your information matches what they require, the more likely you are to obtain the funding. This means tailoring your business plan and presentations for each target audience. The two basic kinds of financing you can get are equity and debt financing.

With equity financing you must give up some of the ownership of your company in exchange for the money provided by the investor or investors. You can put in the money yourself or also get equity financing from others by getting investors, either private ones, such as your family or an angel investor, or public ones, such as through taking your company public or equity crowdfunding. The stakeholders receive a share of your company for their investment. To obtain this type of financing the company must be incorporated.

Debt financing is not associated with ownership but rather you pay interest on the money you borrow. Even with debt financing the lenders will expect the owners or other investors to have provided equity funding.

Your own money

Almost all investors or lenders expect the person seeking a business loan or equity investment to make a personal financial contribution. Assets help, especially assets that lenders will see as collateral. But making your own financial contribution of some sort may be necessary to secure the small business funding you’re trying to get. In fact, up to three quarters of small business start-up funding will likely come from the personal savings of the owners.

If you don’t reach into your own pocket for startup money first, you’ll probably be asked to when you’re trying to get financing. If you are not confident enough in your business idea to risk making a personal investment, why would anyone else?

If you don’t have ready cash on hand, look to your personal assets as possible sources of startup money for a small business. These can include stocks and bonds, real estate, automobiles, retirement accounts, or any other asset that can be sold for cash, mortgaged or used for collateral.

Home equity loans are one of the most cost-effective ways to borrow as the interest rates are very low compared with other types of financing. Financial institutions will typically lend up to 80% of the value of a home.

While not recommended as a sole source of startup money, a personal line of credit is another important source of funds for your startup phase. Hopefully, you’ve already prepared for this source of funds before you decided to start a business by having established a relationship with your local bank manager and by ensuring that your credit rating is in good shape. Banks can be hesitant to provide a line of credit to someone unknown to them, especially if that person doesn’t have a credit rating established or the appropriate amount of collateral.

Credit cards are a last resort source of startup money on the short term for asset-poor entrepreneurs even with the high rates of interest. The objective should be to pay it off as quickly as possible.

Family and Friends

If you don’t have enough of your own money to fund your startup enterprise, you might turn to the second most popular source of small business startup funds – family and/or friends. This kind of small business financing can take the form of a personal loan, a small stake in the enterprise or even a gift. In general, approximately half of initial private investors in businesses are family members, one third are friends, and the remaining 20% are colleagues or strangers.

The main advantage of family/friend financing is flexibility. They are also: more likely to seek a lower rate of return on their investment; more likely to wait longer to get their money back; less likely to require collateral; and less likely to scrutinize your business plan to the same degree as a financial institution or an outside investor.

Some potential downsides:

Borrowing from friends and family can also be associated with potential problems in that everything becomes personal. Loans from one or more family members to another can create resentment among other family members. If the business fails and you are unable to repay the money your relationship with the family/friend investor(s) may be permanently damaged. Family or friends who have invested in the business venture may also feel they have a right to participate in your business decisions.

To avoid issues that stem from a lack of clarity make sure (with your lawyer) that you draw up and get the investors to sign the proper documentation for the loan(s). This documentation includes details such as repayment terms, interest rates, and the fact that, as the owner, you make the decisions regarding the operation of the business. Review and sign the documents with your family/friend investors(s).

Crowdfunding

Individuals or small businesses can take advantage of crowdfunding to get early-stage support for their ideas. Crowdfunding is the raising of funds for a private company through the collection of small contributions from the general public (i.e., “the crowd”) using the Internet and social media. Fundraising is conducted online by starting a crowdfunding “campaign” via one of the crowdfunding sites such as Kickstarter or Indiegogo.

Traditionally, buying equity in a startup was reserved to accredited investors (those who have a net worth of more than $1M, excluding their home, or those who make over $200K annually over the past two years). Crowdfunding simply refers to the idea of raising funds for a project or cause through a large group of individual investors online for as little as $100 each (maximum of $1500).

There are typically four types of crowdfunding, each has the same premise of receiving money from interested individuals. These include donation crowdfunding, reward crowdfunding, debt crowdfunding, and equity crowdfunding.

With donation-based crowdfunding people give a campaign, company or person money and receive nothing in return. With reward crowdfunding, you raise your funds by providing a small gift or product sample (when available and often at a discounted rate) to your supporters if they pledge a certain amount. As for debt crowdfunding, you receive a loan and pay it back within a specific time frame. Some prefer this over a bank loan because it can be much faster. And last, but not least, equity crowdfunding means you give a portion of company ownership, based on the amount of their contribution, to the people who provide you with funding. Equity crowdfunding requires more emphasis on educating potential investors who don’t necessarily have an investment background.

Many individuals assume crowdfunding is an easy or free way of making money, but it requires a lot of effort to establish a project that backers will perceive as a valuable product or service. Success isn’t guaranteed, and as crowdfunding has gained popularity, backers tend to scrutinize the projects more than before. It’s important to make sure your marketing message is well thought out and to identify cost-effective strategies to promote your campaign and reward backers.

In essence, equity crowdfunding is raising capital from the crowd through the sale of securities (shares, convertible note, debt, revenue share, and more) in a private company (that is not listed on stock exchanges). With equity crowdfunding, companies sell securities, whether in the form of equity in the company, debt, revenue share, convertible note, and more. Equity crowdfunding gives investors skin in the game.

This has benefits for the company as it can create hundreds of brand ambassadors who want to see you succeed, and who you can depend on to spread the word about their business and share the product with their own network. What makes this more appealing is that the entrepreneur raising capital has total control of the offering. What to sell, how much, and at what price are entirely up to the company raising capital. They set the terms, including their valuation and how much capital they hope to raise.

Angel Investors

Angel investors are high-net worth individuals or groups of individuals who provide private early-stage capital for businesses and whose investments represent one of the most sought-after forms of entrepreneurial financing. Even when a team, technology, or idea is well-prepared for the market, finding an angel investor that fits the company’s vision can still be difficult.

In general, angel investors are searching for teams that blend professionalism with a deep passion and dedication to the product itself. No two investments are the same and angels will demand a business plan, time to do their own research, and a worthwhile stake in the businesses in which they risk their money.

Aside from ensuring angels having a high degree of trust in you, you need to also ensure that the private investor has the funds to invest in your business. If the investor is part of a group rather than an individual and your enterprise is attractive to them, the funding is more likely available.

It may be worthwhile to identify your existing investors to your potential ones. If well known and/or respected individuals or companies have invested in your enterprise, it can help to build trust and lower the risk for other potential investors.

Angels are typically looking for:

A Solid Return – Angel investors are looking for a higher return on their money than they would receive on the stock market, but this desire coincides with a high degree of risk. They look for companies with growth and even export potential, but they understand that it may take several years before their investment will pay off.

Motivation – The three general categories for angel investor motivation include the monetary, the challenge-seeking, and the philanthropic. Monetary is self evident in needing a high financial return on their investment. While a challenge-seeking angel investor is most attracted by the excitement of creating something new, disruptive, or enjoyable, a philanthropic angel may be most concerned about helping his or her community or even the world at large. To successfully stimulate their interest, you will require knowledge of their motivation and investment history.

Solid Leadership Team – Proven leadership ability is a must when trying to secure investment of any kind. Angel investors are really backing the people that make a business possible rather than just the idea itself, and they demand evidence that a business is in the hands of competent, trustworthy and enthusiastic champions. For most enterprises, a well-rounded leadership team will include individuals with the appropriate experience for the enterprise (i.e. manufacturing, accounting, sales, and research. It is often said that it is better to invest in a superb individual (champion) with a good idea than a mediocre one with a great idea. Many angels follow this principle.

Your team needs to demonstrate passion, loyalty, business savvy, ability to execute the plan, fit with culture and role and flexibility. Your angels also want to know that you have a diversification of skills on your team. If most or all of the team members have similar skills, they tend to disagree a lot over the same matters and other important areas are left with a void. Lastly, does the team share the same vision and possess the skills to execute the business plan

A Comprehensive Business Plan – Angel investors want to see a business plan that’s both convincing and complete, including financial projections, detailed marketing plans, and specifics about target markets. They want to see a developed vision that includes details of how to grow the business.

Involvement – Many angel investors expect to actively contribute their time to any venture in which they invest. This could be through acting as a mentor to the company’s leadership, serving on the board of directors, and/or taking an active role as a manager in the company. This additional participation is a way to help ensure a return on their investment, and a reminder that these angel investors are seeking new knowledge, experience, and professional connections through the businesses they support.

Available Equity – While some angel investors give direct loans to a business, more than half are looking for a minority equity ownership position. This means a business has to be structured to allow for equity investment and owners must be prepared to give up a certain amount of control in exchange for money. Most angel investors will expect a formal shareholder agreement which lays out the contingencies of their investment.

Exit Strategy – Before any money changes hands, angel investors may expect to be presented with a variety of viable exit strategies for their investment, as well as a comprehensive risk analysis for each. Even the most patient financiers, who actively seek and manage long-term investments, need to understand how they’re going to earn a return, and may expect the chronological details of their payout. The sale of shares to a company’s principals is a common exit strategy for angel investors who hold equity ownership positions, whereas the sale or merger of a company is a common exit strategy for debt-holding investors.

Finding an angel investor is not a particularly easy task, but the effort really pays off when you find the right angel investor who is willing to invest in your business. Besides providing the capital your business needs, the advice and know-how of an angel investor can be key to shaping your company’s success.

Understand what the angel investor is bringing to the table besides funding. Pick an investor that meets your needs. You may need an advisor who fills a temporary skill void, one that gives you autonomy (there is always a risk they might have conflicting ideas on how the business is run), one that understands your industry and/or your business, one that has an important business network, one that has the funds, one that has a successful track record or one that is in it for the long term. If you pick the wrong investment ‘partner’, it could have disastrous consequences to your enterprise.

Finding your angel(s):

Characteristics – The typical angel investor is 40-60 years old; holds the investment for 5-7 years; enjoys mentoring and participating in the enterprise; refers investment opportunities to other angels even if they don’t invest; identifies opportunities through network referrals; has experience as entrepreneur; has a net worth over $1m; invests $100-200k individually and over a million as a group; and knowledge of industry.

Look Local – Many angel investors like to play an active role in the business they invest in. Therefore, they prefer to invest in businesses that are close to home so they can drive over when they wish to meet with the principals.

Use Your Network – In most cases, you need to be referred to an individual angel investor. They are not always easily identified so to find the right one you may be able to use your network or the network of your network. Focus on business owners, especially those who are in a related industry or ones you have identified as having an interest in your type of products, services or markets.

Seek Out Angel Groups: While there are some angel investors who invest entirely on their own, many operate as part of an informal network or syndicate where they can pool their resources and share the risks. These are easily identified on the internet. The next step is to understand their areas of interest ex. Internet/technology based, manufacturing, environmental, etc.

Venture Capitalists

A venture capitalist (VC) can be one individual, but it’s much more likely that they are part of a venture capital firm that secures investment money from its members. An investment from a VC is in the form of equity financing whereby the VC investor supplies funding in exchange for taking an equity position in the company. Equity financing is normally used by non established businesses that are unable to use debt financing, such as business loans from financial institutions.

VCs are particularly attracted to promising startups, technologies and new industries, such as clean technology, IT and biopharmaceuticals, where they can participate in the expansion phase. VCs secure their investment capital from wealthy investors, pension funds, insurance companies, etc. and are willing to take more risks than other funding sources because they expect very high returns. In a VC firm, a group of analysts at the firm makes the decisions about which businesses to invest in, and they receive consulting fees (such as a share of the profits) as compensation for their research, analysis and advising roles.

VCs offer some benefits beyond the business financing. Many VCs have extensive business experience that can be invaluable to many of the less experienced entrepreneurs. Another benefit is that VCs will stick it out for the long term until they are satisfied with the increase in share value; the company goes public; or is purchased.

On the other hand, there can be disadvantages to giving up equity in exchange for VC funding:

• VCs will likely expect a significant amount of equity for their dollar especially if the enterprise does not have a history of achieving financial results.
• VC firms may obtain majority voting rights or special veto rights (either through obtaining a majority of the shares or a preferred class of shares).
• VCs may also insist on first rights for compensation in the case of a share sale. This may not be an option for entrepreneurs who want to retain control of their businesses.
• You will need to provide VCs with detailed business plans and forecasts that clearly demonstrate that their investment in your enterprise will be secure and profitable. You will also have to devote a significant amount of time to meeting with and updating VCs on an ongoing basis.

The less established your business, the more equity you will need to give up for the same funding. Therefore, you need to build the business as much as possible before seeking VC funding. Since they are investing in people as much as the enterprise idea, adding well respected names to your enterprise, including your Advisory Board, can make the investment more attractive.

Banks and Other Financial Institutions

The third most popular sources of small business startup money are traditional financial institutions, such as banks, credit unions and caisse populaires. The main advantage of a bank loans is the lower rate of interest than private investors. Banks can loan money at lower rates because they have access to funds from federal institutions and depositors.

Financial institutions, in general, are becoming more conservative in their evaluations of prospective small business loan customers. As a result, they are reluctant to lend to small businesses especially in the early stages, even when presented with a clear vision and a solid business plan. They are in the risk management business and start-ups have a high failure rate. They need a reasonable assurance that you will fulfil your loan requirements. By virtue of their lower credit scores and business age on average, women-owned businesses face even bigger barriers to financing than men. Often, they are approved for funding at a higher rate and a smaller amount than men. Early-stage business owners in general have a low probability of securing a loan from a financial institution. To have any chance early-stage owners need to have:

Good credit rating

Even though you’re going after a business loan, your personal financial standing will be scrutinized as well. This will include your credit score and your debt to income – should be no more than a third of your gross monthly income. You need to have a good credit rating if you are going to get a business loan from a traditional bank or through a government program. So, it’s a good idea to check out your credit report first from companies such as TransUnion and Equifax to find out what your potential lender(s) will see when they research your credit.

If there are credit issues or your credit score is low, you need to know what to repair and repair what you can. The sooner you address your credit issues the better your credit score will be. You may find that the lender is only willing to give you a personal loan rather than a small business loan or you are expected to sign a personal loan guarantee.

If you are a person with no credit rating, you will need to establish one before you will be able to get a small business loan. Basically, you establish a credit rating by buying things on credit and paying back the money you owe. Beyond clearing up negative items, bolster your credit by opening credit cards or other forms of credit, making timely payments, and keeping your balances low. Your loan repayment history plays a big part in establishing your credit rating, but all your “credit” dealings make up the history that’s used to determine your credit rating.

If you have an established business (in business for two years or more) you should also check out your business credit score with companies such Dun & Bradstreet to ensure there are no mistakes on your reports or credit issues you need to address. Some examples of business information you’ll need to repair:

• Your payment history (makes up a third of your credit score). – Past due accounts that are late, charged off, or have been sent to collections
• Incorrect information – Includes accounts that aren’t yours, payments that have been incorrectly reported late, etc.
• Maxed-out accounts that are over the credit limit

Capital invested

One of the factors bankers use during a business loan evaluation is the amount of funds the owner has invested in the business. How much skin you have in the game is very important and can make the difference between an approval and denial. Most likely there will be a more favorable consideration for a business loan if there is a “reasonable” amount invested in the business by the owner. Lenders use your debt-to-equity ratio to determine how much you seek in financing relative to how much you’ve already invested in the business. Aim for a ratio of 1-1.5 to show lenders that you’ve invested a reasonable amount in your business but still have the ability to repay debt. The smaller the ratio the better.

Business plan

Lenders scrutinize business plans to ensure that the business they plan to lend to is likely to succeed. If you have a business plan that demonstrates a solid business model backed by sound management, your small business loan application will be more difficult to deny. In some cases, a strong business plan can even avoid the need to put up collateral to secure your loan. Your chances of getting a business loan will be greatly improved if you have all your documents in order and are prepared to allay the lender’s concerns about loaning you the money. Think of it as a presentation to an important client or customer, and you’ll have a better chance of success.

Collateral

Typically, the greater the collateral (assets) the less the risk, so identifying your assets can be paramount in securing a bank loan. Assets are required to determining net worth. A simple way to calculate net worth is to subtract liabilities (what you owe) from assets (what you own). Each lender considers the loan-to-value ratio differently, so you’ll need to ask your lender how they intend to set that value.

Current assets are items that are currently cash or expected to be turned into cash within one year. For your business, tangible assets may include cash, inventory, accounts receivable, commercial real estate, heavy machinery and business equipment. Personal assets usually include cash and cash equivalents such as stocks and bonds; real estate and land; personal property such as cars, boats, and jewelry; and any other investments. Intangible assets don’t exist in physical form. They may include items such as brand names, distribution networks, patents, proprietary processes and methodologies, and copyrights.

Collateral is something that helps secure a loan. When you borrow money, you agree (somewhere in the fine print) that your lender can take something and sell it to get their money back if you fail to repay the loan. Collateral makes it possible to get large loans, and it improves your chances of getting approved if you’re having a hard time getting a loan.

Lenders need, above all else, to get their money back plus interest. They don’t want to bring legal action against you, so they try to use collateral as a safeguard. They don’t even want to deal with your collateral (they’re not in the business of owning, renting, and selling houses), but that is often the easiest form of protection. When you pledge collateral, the lender takes less risk, which means you’re more likely to get a loan and at a good rate.

In general, the lender will offer you less than the value of your pledged asset. If your pledged assets lose value for any reason, you might have to pledge additional assets to keep a collateral loan in place. Likewise, you are responsible for the full amount of your loan, even if the bank takes your assets and sells them for less than the amount you owe. The bank can then bring legal action against you to collect any deficiency (the amount that didn’t get paid off).

Cash flow

Your business’s cash flow projections give lenders concrete financial data that they can use to assess this risk. Investors want to see a healthy operating cash flow margin and the healthier the better. To them, your cash flow is the best indicator of your ability to pay back a loan. So, if your cash flow is anemic or worse, choked off, you need to sort this out before you apply for a small business loan.

Credit capacity

This is an evaluation of your company’s ability to repay on a loan or business line of credit. This includes positive cash flow, bank history, payment history, and additional cash sources and reserves. The best way to show your credit capacity is with positive cash flow, a favorable bank rating, and positive payment history with other businesses.

When it comes to payment history, banks, lenders, and suppliers want to know how long an account has been opened, the credit limit extended, and how many times the account has been paid late.

A Well-prepared Presentation

The final step in how to get a business loan is to persuade the lender that your business is viable, and you are a good credit risk. You need to prepare in advance to make a winning loan presentation.

Consider the lender’s point of view: Lenders are most interested in the answers to these two questions: “Are you a good risk?” and “What are you going to do with the money?”

Past business tax returns: If your business is established and you have past business tax returns, it’s a good idea to take them with you. They’ll give the lender a better idea of how your business is doing financially.

A statement of your personal financial status: A list of your personal assets and debts to give the lender a fuller financial picture. The higher the assets, the lower the risk for lenders.

Expertise and/or experience in your chosen field: Because the success of your business is dependent on this to a great degree, any potential lender should want to know more about you. Be prepared to talk about yourself when you apply for a small business loan – your background, your expertise, and even your aspirations.

You can also set up a line of credit from a bank, credit union, or alternate lender (most banks require you to have been a business owner for a certain period to qualify for one). A business line of credit is a flexible loan with a pre-set borrowing limit. You can use it like you would a credit card: Use the line of credit up to the limit when the need arises to access cash for business expenses. Interest accrues on the amount you borrow, and when you repay what you borrowed, the funds become available again. It’s a great way to cover gaps in your cash flow. As you make payments on time, you can build your credit profile to the point that you can obtain a traditional loan.

In addition to the bank loan for your start-up enterprise it is important to evaluate the terms of your everyday banking. Charges can include monthly fees for business account, fees for electronic debits and credits, required minimum balance, cost for cash deposits in a branch, costs for ATM deposits, costs for paper credit debit and debit transaction.

Business Grants

Many small-business operators see government grants to start or expand a qualifying enterprise as the most attractive option, since the funds do not need to be paid back. On the other hand, small-business loans do have to be paid back and often with interest. Unfortunately, almost all the government grants available have strict requirements and very specific target candidate criteria. The government’s purpose in providing grants to businesses is to spur the development of businesses in particular places. Exporting, technology, and alternative energy are examples of areas the government is keen on funding. They might, for instance, be focused on creating a software hub in New Brunswick or supporting the number of call centers in the Northern Ontario. If your business aligns with one of the segments they support, this can be an attractive option.

The federal government prefers to invest in small businesses by operating loans programs, or assistance programs, that involve some sort of shared contribution, rather than in small-business grant programs. For instance, in many cases, small-business grants require a financial investment by the applicant. So, although the grant itself doesn’t need to be paid back, to get the grant, you need to put down your own money first. The funders see your investment as demonstrating a commitment. An investment of 10% to 50% is standard. Job creation is another common expectation to receive a government grant to start a new business.

As a result of the high demand for many small business grants, the competition is fierce, and the application process is often onerous and time-consuming. Since each grant has unique goals and application requirements, it can be highly effective to tailor your presentation, handouts and even videos individually for each one. Your target audience should ‘identify with your products/services’ as it relates to their program and clearly demonstrates that you have done your research on the grant-making organization.

Beyond simply including the required elements in a grant application, ensure that your application clearly communicates your business vision and track record with examples, how you plan to use the money, and how your business profile and need for the money align with the goals of the grant program. This step will help you demonstrate that your business aligns with the specific mission the grant aims to advance, which is a key criterion for moving forward in the selection process.

If writing isn’t your forte, request assistance from someone who has excellent writing skills, preferably with prior experience in writing grant applications. If you’ve already written a draft of the application, have a professional editor look over it. Likewise, if images, logos, or video clips are required, have them professionally produced if you can afford to.

Once you’ve mastered the art of writing grant applications, investigate different types of loans that are geared toward your type of enterprise. Determine whether the requirements and award amounts for each grant are suitable before you apply.

Other Sources for Small Business Loans

There are many other sources for small business loans in Canada and too many to describe here in detail. As with business grants, there is selection criteria for most of these loans. They may be related to age, location, market segment, sex (ex. Loans specifically for women entrepreneurs) or even new immigrants. The best way to research the many programs available is a simple internet search on ‘Small business loans in Canada’. To narrow down your search, use descriptors that describe you’re the size of loan, business location, age, industry segment, government or private loans, etc.

Some examples include:

Federal and provincial governments – An excellent website for information on the Federal Government programs is: https://innovation.ised-isde.canada.ca. A simple internet search can lead you to provincial programs.

Community Investment Funds (CIF) – Typically, non-profit organizations that get their working capital from local communities and invest in business ventures in those communities.

Business Development Bank of Canada (BDC) – BDC offers business loans to startup businesses to invest in: Working capital to supplement an existing line of credit; fixed assets; fund marketing and startup fees; a franchise purchase; and consulting services

Credit Unions – While banks have traditionally been the main provider of credit to small enterprises, credit unions have become a more reliable source of financing for small businesses in the era following the Great Recession. Commercial banks have generally shifted their focus to lending to larger, more established firms. Credit unions are smaller, more locally oriented institutions, and as such, are more likely to lend to small businesses in their communities.

The Bottom Line

When you need money to finance your enterprise startup or expansion, you have to assume there will be a trade-off between the factors. It’s easier to get a loan, and you keep control of the business, but the cost can be high-interest rates and there is always a chance that the lender will foreclose if you don’t meet the terms of the loan. It’s more difficult to get investors, and they may demand control of the business. Investors take a large risk because they could lose all their money; for that risk, they demand high returns.

The reality is that an early-stage enterprise with limited financial results does not have a great perceived value. As a result, an investor would expect a large share of the business for their investment. It is better to wait for the enterprise to deliver tangible results so that the perceived share value is much higher. Therefore, if you are just starting a business, a business loan is likely your best bet for raising money.

Minimizing Funding Requirements

The most important principle around funding is minimizing the need for it as much as possible without inhibiting the planned growth of the enterprise. Whether from equity or loan sources, acquiring funds can be time consuming and requires that you either give up a portion of ownership or you risk your existing assets. While this may be a requirement at some stage, you want to delay this as long as possible so that you are able to negotiate much better terms with the funding providers.

By minimizing funding requirements, I mean that you carefully manage your capital and operating expenses. There are things in the business that must be funded, such as company registration, licenses, permits and even a patent application. There are also things that are optional or flexible in that they can be delayed or not done at all such as marketing campaigns, new office furniture, etc. To identify the more flexible expenditures, start by making a list of all your startup costs and then brainstorm possible less costly ways of doing things or what can be delayed.

Marketing your startup enterprise provides the most flexibility with regards to funding management. Utilizing online marketing tools such as social media, email, and websites can be set up initially at minimal cost if you choose to do much of it yourself or with your staff.

The use of technology offers many opportunities to minimize expenditures:

Online Meetings – There are many Web conferencing tools that allow you to connect with customers, team members and suppliers located all over the world – some even at no cost. While face–to-face contact has its advantages and is usually desirable, online meetings can save a great deal of time and money on travelling costs if used effectively.

Telephone Service – Small business owners are not tied to an office or computer in order to do their work and stay connected. As an alternative to expensive to landlines you can utilize VoIP, cell phones, etc.

Online Skills Development – There are myriad self-paced online training resources that cover just about any topic you would want to learn. Online training programs are an excellent way to expand your business knowledge and specialized knowledge for your staff without incurring the expensive travelling and registration costs of live sessions.

Employees may be able to work remotely, which eliminates the need for office space. It also allows them to write off part of their property expenses. Another way to reduce your personal funding requirements is by having one or more business partners. The bonus is that, if partners are selected properly, you can share the workload and fill some of the important positions in the enterprise.