Around 50% of people aspire to self-employment. Some will become their own boss by becoming sole proprietors as freelancers or consultants. Others will launch a more traditional business with physical or digital products and employees.
Of course, launching a freelance enterprise or a traditional business means overcoming a number of obstacles.
You need a skill or product idea you can market to a sufficient number of potential buyers. In the case of a more traditional business, you need the right employees with the right expertise. Of course, you also need a reliable business funding service.
Given that insufficient working capital is one key reason that businesses fail, it’s hard to overemphasize that last obstacle. Before jumping into what you should look for in a funding service, let’s take a quick look at the available kinds of services.
Funding Services
Funding services come in a lot of shapes and sizes that serve vastly different kinds of businesses. Here are a few of the main options.
Microlenders
Microlenders offer very small loans that can range from a few hundred to a few thousand dollars. These can prove ideal for someone who only needs a little startup capital for basic startup expenses or has bad credit.
Banks
Banks serve as most people’s first stop in their quest for funding. Banks specialize in loans and other types of revolving credit. Banks often prove a tough nut to crack for business loans since they require excellent credit, detailed business plans, profit projections, and even collateral.
Angel Investors
Angel investors usually fit a specific profile.
They’re successful businesspeople already. They provide seed money for a percentage of your business. They expect a reasonable profit from their stake in your company.
Venture Capitalists
Venture capitalists invest professionally in other businesses. They typically ask for a substantial stake and active hand in running the business. They look for businesses they perceive can make them a big profit.
Other Options
Other options include economic development organizations, vendors, and even grants. Funding search companies, such as YourFundingTree.com, search through a variety of funders based on your specific needs.
A Track Record
Venture capitalists and angel investors may specialize in funding unproven business concepts, but you can’t take that kind of risk.
You’ll end up giving your funding source access to all kinds of sensitive personal and business information ranging from:
- Your social security number
- Your home and/or business address
- Your business plan
- Personal financial information, including bank account information
Anyone with that kind of information at their disposal can, quite simply, destroy your life. You can hand over that kind of power to just anyone.
You need a funding source that has a proven track of survival and sound business dealings. You can do basic research on a company’s information and business practices through the BBB. You can also ask what other businesses they’ve funded in the past.
Contact those businesses and ask about their experience with the funding source.
Reasonable Interest Rate or Stake
Reasonable is a relative term depending on how badly you want to launch a business. In terms of interest rates, you should look for industry average interest rates for the type of loan you want. If the industry average hovers around 4% APR, you probably want to take a pass on the loan offer you got for 18% APR.
If you’re pitching angel investors or venture capitalists, the overall stake can vary a lot. Angel investors might only ask for a 10% equity share or a 50% equity share. It depends on the size of the investment and the potential revenue of the business.
Say that an angel investor fronts you $25,000, but you project revenue of $250,000 a year. In that case, the investor might only ask for a 10% stake since they can expect a reasonably fast return on investment.
If the angel investor fronts you $150,000 with projected revenue of $250,000 a year, they might ask for 25% or more.
Venture capitalists often invest in a series of rounds. They get a set equity stake for each influx of cash.
After the first round, they may own 15%. After the final round, they may own 50%. It depends on the terms you negotiate.
Expected Rate of Repayment
You need a fairly clear idea of how long it will take your business to become profitable. Without this information, you can’t reasonable seek funding from any source.
You can use industry averages as a general guideline, but you must temper those expectations with local realities. The cost of running a business in Los Angeles will prove much higher than the cost of running a similar business in Dayton, OH.
Microlenders, banks, and vendors typically tell you how long you get to repay, typically measured in months or years. Angel investors often offer more flexibility if you show progress toward profitability. Venture capitalists will typically tell you how fast they expect to see the growth that spurs stock price increases.
You must weigh the pros and cons of each rate of repayment against your expected move into profitability. If you think it’ll take you a full three years to achieve profitability, you’ll probably want to stick with banks or angel investors. If you expect a rapid expansion of the business, venture capital may prove the better option.
Parting Thoughts on Reliable Business Funding Services
Picking a reliable business funding service is about more than just whether a service offers you funding.
You must consider how long the service has existed. Did that service work well with other, similar businesses?
Does the service expect a reasonable interest rate or equity stake? If an investor wants a 60% stake for a small initial investment, it’s probably a bad deal. If a lender wants an excessive interest rate, look elsewhere.
Interested in other funding sources? Check out our articles about crowdfunding services like Kickstarter.
