Sometimes, you need access to capital – a cash infusion to make your dream a reality. Hard work isn’t always enough. Don’t let that prospect scare you because there are options. It is up to you how well you prepare for them.
Micah Dickson, Small Business Community Lender with Fifth Third Bank was a recent guest on the Business is ART podcast entitled “Access to Capital.” We talked about a few do’s and don’ts when it comes to seeking funding for your business or startup.
What are some capital funding options?
There are a variety of sources to which you might turn for a cash infusion, including:
- Your bank account, retirement account, and other assets
- Your friends and family
If you are like many entrepreneurs and business owners, you will likely exhaust those options first. But then what? Again there are multiple options, including:
- Crowd Funding
- Crowd Lending
- Commercial/Small Business Loan
- Private Equity Investor (PE)
- Venture Capital Investor (VC)
Crowd Funding and Crowd lending can be very effective. Within the parameters of the Crowd Funding or Lending service provider, you can define what donors and lenders receive in exchange for providing you with cash.
But just like selling your products, there is a huge marketing and PR game you have to play in order to attract people and entice them to give, which can be a downside.
What is the least expensive kind of traditional external capital?
Of the three traditional forms of external funding (bank loan, PE and VC), the loan is the least expensive option.
Some may mistakenly believe that PE and VC options represent “free money.” Not true. VC and PE options may very well be the best options for you and your business, but they come at a price.
Typically, that price comes in two forms: control and ownership. When a VC or a PE gets involved, they typically will take some control of the business direction. They are investing in you as well as the business, so they aren’t likely to take total control, but they will at least influence direction. That theoretically is a good thing, unless you insist on total control.
The PE and VC also take some percentage of ownership, so you will no longer own the entire business. They are going to want their money back, plus a significant chunk of cash on top. That may come from selling the business, selling their share of the business, or receiving significant portions of the revenue or profits generated from the business. At the end of the day, this can be very expensive to you.
The bank, on the other hand, wants one thing: to be paid back with interest. That’s it. You maintain 100% of ownership and control.
The downside is that there may be more hurdles to accessing capital through a bank because a bank wants to be very sure it is going to get its money back. The bank wants as close to a sure thing as possible, so it is going to scrutinize more deeply and look for more existing capital and assets from your business and from you personally.
A PE or VC, on the other hand, is placing more of a bet. They know not all of their bets will pay off, which is a primary reason they demand so much more in terms of control, equity, and payback.
When should you start planning to access external capital?
Before you need it.
Assume that at some point you will need access to capital, even if you never will or think you never will. Then prepare for it by doing the following:
- Take care of your personal credit – it will matter
- Prepare and maintain a business plan – it will be required
- Create a team of trusted advisors, then seek their on-going advice – accountant/financial advisor, attorney, insurance agent, business consultant/coach, advisory board
If you do these things, not only will your business run more smoothly and successfully, you will be better prepared – by far – should the time come to seek a cash infusion.