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Financing Alternatives

Written by: Bill Warner

Article Overview: We are often asked about how a company can get its initial financing. There is usually considerable misunderstanding about the various alternatives and their implications. This article positions the various alternatives that a company should consider before embarking on a financing strategy.

Financing Alternatives

We are often asked about how a company can get its initial financing. There is usually considerable misunderstanding about the various alternatives and their implications. This article positions the various alternatives that a company should consider before embarking on a financing strategy.

Starting Your Company

From the time you have the idea for a new company until you are ready to actually launch the products or services, financing is required to prepare your company for doing business. Such expenditures are:
* Market research and competitive analysis
* Business and financial plan development
* Product or services development
* Marketing and sales planning
* Management team development
* Patents, copyrights and trademarks
* Incorporation and other legal matters

When you are still at this idea development stage, there is no opportunity to reach out to sophisticated angel investors or venture capital firms. Your company is not mature enough for them to consider it. In order to finance these activities, you need to consider the following alternatives for seed funding:
* Founder funding
* Grants
* Loans
* Friends and family

Let's take each one and explain the purpose and implications.

Founder Funding

Sometimes the founders of the company have the financial resources to provide the seed funding of the company. The founders may be successful entrepreneurs or business people, who have the capability to provide this first round of funding.
This is ideal in many ways. There is no outside funding required. The founders will own the entire company in this first financing stage. Future investors will see that the founders have initially put their own resources into the company.

Grants

When market research and proof of concept have not been established, getting a grant to complete this work is very advantageous. Sometimes the process of applying for and administering a grant are long and tedious, but the rewards are significant in that you usually do not have to repay the grant in any way.

Some of the most attractive programs are the SBIR grants available through the US government and its participating agencies. You should contact the Small Business & Technology Development Center (SBTDC) to determine if you could qualify for a grant with such agencies as the Department of Defense, Homeland Security, the National Institute of Health and many others. Go to their website at www.sbtdc.org to learn all about it. Also, many of these grants have matching funds available from state governments. For example, North Carolina is one that offers such matching funds. Of course, there are many grants that are possible from private foundations and corporations, all of which should be investigated to see if your company is eligible.

Loans

This may sound ugly but you may have to consider it. Banks do provide loans for businesses, but there is no panacea about it. They will want the loan to be fully collateralized by someone. If you have the assets to provide the backing for the loan, like stock or other assets, you can do this yourself. Of course, if you had those assets, you might have considered liquidating them to provide the seed financing in the first place, but sometimes you may want to keep the integrity of these assets without liquidating them. Either way, these assets will be locked in by the bank to back the loan. You can also consider a business partner for providing all or some of the loan backing as well.

The upside of this alternative is that you will still retain ownership in your company, but you will have to pay off the loan whether or not you succeed or fail.

Friends and Family

Quite frankly, this is the good old fashioned way of getting seed financing. Entrepreneurs simply go to the people that trust them and know them the best and ask for funding for their business idea. This form of financing happens every day in formal and informal agreements between entrepreneurs and their family and friends.

To accomplish this, you simply create a list of all the people you know who could finance your company or who could refer you to people who could finance your company. Then, you approach them with your business idea and offer them a share of the opportunity for the seed funding they provide.

You will have to be fair with them in providing an appropriate share of ownership in the company for the large risk they are taking in financing your company at this very early stage.

The advantages are that you are doing business with people that know and trust you, and the process to close on funding is usually very simple. The downside is that, if you fail, you have lost the money you obtained from these close family members and friends.

Summary

Finding the initial funding for your company will take a lot of your time. Spend the time to establish a solid financing strategy and do your best to be prepared to execute whatever alternative you choose. You will not get any second chances at this otherwise.

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Article Tags: angel investors, competitive analysis, copyrights and trademarks, development marketing, development stage, doing business, entire company, expenditures, financial resources, founders, incorporation, legal matters, management team development, market research, misunderstanding, own resources, planning management, proof of concept, successful entrepreneurs, venture capital firms



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grants for restaurants - Well friend I don’t have any idea about government grants for restaurants, but I will recommend that you may try on some banks who offer loans for small business where the government will have some guarantee. Beside that Restaurants business is very risky so some of banks who gave some Financing Loans they will look at on it if there is enough solid business plans.
Re: How to finance your independent movie - Hi, The video doesn't come up with its own URL... But it's the very bottom video on the page. Here's the description of it: Financing, Production and Social Impact of Feature Films Host- Carol Atwood - Founder, Spartacus Media Enterprises Panelists: Bill Johnson - Co-Founder and Partner, Inferno Distribution Steven Haft - Producer, Media Consultant Michael Goorjian - Actor, Producer, Writer
re: restaurant start-up - I'm not sure about government grants for restaurants, but my recommendation would be to approach a lender that offers loans under the Canadian Small Business Financing Loan program where the government will guarantee 85% of the loan. You can borrow up to $250,000 to finance equipment and renovations under this program. Restaurants are very risky business, however some of the Chartered Banks will look at restaurants if there is enough of an initial equity investment and you have a solid business plan (experienced management team, good concept and strategic location).
Re: What Franchisors Want From Franchisees - Thanks for the follow up Russell. I found the following tip to be especially helpful: [quote="RussellWebb":2vqd3szf]Financing arrangements will vary - if you can show that you have 20% above all of your start-up costs, this would help. The more assets you own the better.[/quote:2vqd3szf] By the way, is there a way for someone to achieve a close to "1000" credit score? I've always paid off my Visa bill and car payments on time... but I bet my credit score is not even between 800-1000. I wonder what the secret is to 1000?
Re: Kevin's Case Study #8 - How do you attract a finance expert? - I think the best way to find any reputable accountant would be by recommendation. If you cannot get one by recommendation then you should put those you narrow down your search to through an in depth prescreening process. Check the out their firm with BBB and make sure they are licensed & registered. Always check credentials and make sure they graduated from the schools they claim to have attended. Financing should be found in accordance to the type of financing you need and the type of business you are financing. You should always get prequalified before commiting to an application. You should seek out those financial institutions that specialize in the type of financing you are seeking and then check to enure they can finance your type of business.


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