Choosing how to fund your small business is an important aspect of your overall business plan. Depending on your decision, it can also affect your business and its ability to generate revenue and remain viable for years to come.
Here we’ll explore three different options for small business funding: seeking investors, incurring debt and bootstrapping. We’ll also examine the pros and cons of each, and what scenarios work best in each instance.
When to Get an Investor
Before choosing an investment over a loan, consider the amount of money you need, how long you need it and what you plan to do with it. If you choose the investment route, you may be required to convert your company into a C-corporation. Doing so shields the investor from liability and you from having to pay back potential lost money; it also means you’ll have a new partner with opinions on how to run your business.
Choose an investor when:
- You need money for a long or uncertain amount of time. The type of investment you want is sometimes referred to as open-ended or permanent capital. Instead of sticking to a set timeframe, in these situations, investors allow businesses to focus on long-term goals without having to worry about meeting short-term benchmarks.
- You need money to grow. In this case, your company should already be profitable and the money you need to reach your full potential should be quantifiable.
- You need a network. You need an investment that offers capital and connections. Often called “smart money,” these investors offer help in the form of finding better suppliers, new clients or additional avenues for revenue.
- You don’t qualify for a loan. Unless your business is already in the black, or you’re willing to put your personal assets on the line, many lenders won’t loan to an early-stage startup they consider to be “high risk.”
- You don’t want the liability of a loan. If you can’t or don’t want to take the risk, you’ll need an investor who is willing to take it for you.
When you seek investment capital from venture capitalists, angel investors or investment firms, you benefit from receiving all of your required capital upfront. This gives you freedom to ramp up your business the way you want with the security of having the necessary funding in place.This can have great advantages in allowing you to purchase the supplies or inventory you need, fully staff your organization and even purchase or lease equipment and real estate for your business.
There are drawbacks to getting investors, as there are with any source of funding. By looking for investment capital from outside sources, you will have to share ownership of your company with these backers. This is typically done by offering shares in exchange for certain investment amounts. This can have far-reaching consequences, as technically these shares give your investors a say in how you run your business.
For this reason, you should be careful when selecting investors, as you want to be sure they understand and share your vision. Find like-minded people or investment firms who will support your efforts, not undermine them. For first-time business owners, it can be difficult to convince an investor to take a chance on you and your idea since there is no proof you’ll be successful.
If your small business needs a lot of money upfront to get off the ground — say you need to manufacture products, rent or purchase real estate or lease a lot of expensive equipment — seeking investors might be your best option.
Funding the initial costs to get a business up and running creates a high barrier to entry for entrepreneurs. Seeking investors can remove this barrier very quickly.