The vast majority of new small businesses are funded with debt financing via financial institutions. If you pass muster, banks can provide you with a loan or line of credit that comes with a repayment schedule and an interest rate. They will look carefully at your company’s cash flow, collateral and the liquidity of your assets. You’ve got to have a sensible, written business plan, and you must know your financial situation inside and out. Note that one way to increase your odds of success is to establish a relationship with your banker prior to your loan request.
In addition to showing a successful track record in managing their business, they also consider the customer’s existing account relationship with the bank as one of many factors in making lending decisions – and this can also include their personal banking experience.
Consider securing a grant through the Small Business Agencies. There are also numerous state, regional and minority grant opportunities available. By working together with a government agency, you can also optimize resources and cost-effectively perform research (thus requiring less funding). These programs are designed to help fuel the innovative fires at small businesses. Having been on the receiving end of these grants, here’s our bottom line: Billions of dollars of “free money” should not be overlooked.
While debt funding is most common, there are still tens of thousands of companies financed each year by private or “institutional” investors in exchange for an equity ownership stake. They range from the less sophisticated “friends and family” type, to high net-worth private investors known as “angel investors,” all the way up to the sophisticated professional investors called venture capitalists.