To give small business owners a roadmap to successfully funding their business, we sat down with Martin Zwilling, founder and CEO of Startup Professionals. Zwilling is an author, entrepreneur mentor, and angel investor with decades of business know-how.
Zwilling pointed out four foundational funding options with each step priming your business for the next. These four steps are:
- Family and Friends
- Alternative Lenders
- Angel Investors
- Venture Capitalists
“Every investor will want to know what you’re doing with his or her money,” Zwilling said. This makes a foundational funding strategy vital. Here’s how it works.
Step One: Friends and Family
Friends and family are always a great place to start when it comes to funding. “Start there first, but be careful to ask for what you need, typically a small amount, less than $50,000,” Zwilling explained.
Getting funding from friends and family can put a strain on personal relationships. It is important to approach this funding option professionally. Zwilling suggests, “You can use a convertible note, a loan that can be converted into equity.”
It is important to know that the IRS will want to see documentation of any loan. The IRS can also impute interest on a loan. “Promissory notes are documents that contain the terms of a loan so that there is a legally actionable record of the loan specifics,” according to FindLaw.
Going the friends and family route for funding may not be a viable option. Maybe you already used them to get your small business up and running and need cash for the next expansion of your business. Or your network may not have the funds that you need. Now it’s time for step two, alternative lenders.
Step Two: Alternative Funding
“First try to get loans,” Zwilling said. Funding options like a working capital loan or business line of credit can provide the surge of cash flow you need to solidify your business in your industry.
You could try a bank for funding, but most businesses fail to meet the strict loan requirements. Alternative lenders are usually the best option for your next round of financing. The added capital will give you an extra layer of funding to facilitate further business growth.
It also gives you an enticing story future investors want to hear Zwilling noted. “If the story is a good one, it’s a good pathway,” Zwilling said. “It’s all about the person. You invest in the person.”
Working Capital Loans
A working capital loan lets small business owners cover common operation costs, like payroll and debt payments. Clearing debt is important for future investors. These short term loans are flexible and provide access to cash to boost liquidity when it counts.
Most small businesses need more working capital at some point, since outstanding client invoices and unforeseen expenses are common. You can also use your online title loan for expansion, fixing and/or replacing equipment, and of course traveling.
Business Line of Credit
A business line of credit is another valuable funding option that can help you grow your business, making it enticing to future investors. Business lines of credit are also favored by small business owners, because you only pay interest on the money you use.
For instance, if your business line of credit is $100,000, but you only need to use $20,000, you only pay interest on the $20,000 used, not the full amount.
This funding option is as flexible as a working capital loan. You can use a business line of credit for payroll, equipment purchases, marketing campaigns, renovations, as a cash bridge, and more.
Why is all this important? The above funding options help you grow your business, showcase your ability to do so, and make your business more attractive to next level investors like angel investors.
“We are looking for problem solving, creative ability,” Zwilling explained. “First, I worked on this, saved some money, I took advantage of this, then I got to the point of . . . I really need money to create inventory, or to scale this up. Angels will love that story.”
Step Three: Angel Investors
Once you have built out your small business utilizing a working capital loan or business line of credit, you may be ready to go from a small business to a larger company. The funding foundation you have makes you and your business angel ready.
However, there are a few things you need in place for an angel investor to be interested. “They expect a prototype, some customers, some kind of evidence that this is a real business model,” Zwilling explained. “They are interested in investing in a going concern as opposed to an idea.”
If you are not quite ready, you have your business line of credit and working capital loan in place to keep building. However, if you’re ready to pitch angel investors, Zwilling suggests having a detailed plan.
“At the angel level, they look for a business plan, maybe 20 pages, and a pitch, 10 slides that go through the same sequence. Problem, solution, opportunity, competition, business model, five year projection, and exit strategy.”
It is important to understand what you’re giving up when partnering with angel investors. “Most angels who invest will ask for a seat on the board and will become an advisor, and will take an active role,” Zwilling explained.
Depending on how much capital you need to take your business to the next level, you may choose to skip the angel investor step and seek out venture capitalists. Your angel investors may urge you to begin looking at venture capitalists as well.
Step Four: Venture Capitalists
Venture capital funding is all about turning a business into a highly profitable corporation. This is done through venture capital firms. If your business is ready to tackle the global marketplace at a very competitive level, it is time for venture capital funding.
This type of funding involves large amounts. “They don’t invest less than $2 million,
They are talking about big numbers,” Zwilling said. You need to evaluate how much you really need. According to a Harvard Business School report, only 18 percent of small businesses need more than a half million dollars.
Getting funding via venture capitalists also means giving up a large stake in your business. For instance, a venture capital firm may want 33 percent of your business. You will also need to hit big profit margins. “VC’s look for 10 times returns, that’s what they look for, people say that’s crazy, but it’s because they’ve had a lot of failure,” Zwilling said.