What Type of Funding is Right for My Startup or Growing Business?

funding

If you have ever seen the TV show, Shark Tank, or been a part of funding negotiations in the past, you know there are a number of ways that businesses in startup or expansion phases can raise capital with a solid business plan. Investors or banks will want to see their payback projections in the plan, and depending on what yours is, that might lead you to seek a specific type of funding. So, what is the best strategy to get funding for your business?

We have compiled the following advantages and disadvantages of each type of loan or funding from our experience helping hundreds of businesses achieve their goals.


Bank/U.S. Small Business Administration (SBA) Loan

A bank loan can involve a business loan through a bank, as well as real estate loans/mortgages (using your home equity as collateral), lines of credit, and SBA loans. SBA loans, much like FHA loans for home purchases, are made through a bank or lending institution, and the SBA guarantees a portion of loan payment back to the lending institution. Depending on the bank, lending decisions are made in-house at the local branch or on the national level. A business plan is always necessary for this funding choice.

ADVANTAGES DISADVANTAGES
  • Lower interest rates mean that you pay less on the money you borrow than any other method
  • A number of programs to help entrepreneurs qualify
  • Ability to decrease cost to business by paying loan off early
  • Down payment or collateral is almost always necessary, usually between 10-25% of the total funding needed
  • Some banks require you to host business accounts through that bank, which could cost you extra in fees in the long-run
  • If business fails, loan still must be paid back

Equity Method – Angel Investors or Venture Capital

Investors generally want equity in your business – basically a percentage of ownership in your business. This is accomplished by issuing stock or “membership units” for a Limited Liability Company or LLC. Stock and membership units are essentially identical, just different terms for different organizations. This method is generally preferred if an entrepreneur plans to exit the business in 5-8 years. Business plans and pitch decks are usually required.

ADVANTAGES DISADVANTAGES
  • Lower risk to entrepreneur – if business fails, generally nothing is owned to investor
  • Requires no startup capital from entrepreneur
  • Loss of sole ownership in company
  • Usually requires attorney for proper documentation of agreement
  • Investor is sometimes looking for 8-10 times return on investment

Royalty Method – Angel Investors or Venture Capital

This method provides investors with royalties on your business’s returns instead of a piece of ownership in your company. Royalties can include providing the private equity investor a percentage of sales or net income. When utilizing royalties on net income, investors and owners strive toward the common goal of increasing overall profits. Business plans and pitch decks are usually required.

ADVANTAGES DISADVANTAGES
  • Lower risk to entrepreneur – if business fails, generally nothing is owned to investor
  • Requires no startup capital from entrepreneur
  • Generally results in better working relationship with investor because of common goals
  • Usually requires attorney for proper documentation of agreement
  • Investor is sometimes looking for 8-10 times return on investment

 Other Loan Programs

These programs are generally offered by smaller lending companies that are willing to take more risk. These other loans are generally online and will require a full business plan to qualify.

ADVANTAGES DISADVANTAGES
  • Higher interest rates will still be more favorable long-term than investor payback
  • A large variety of programs and companies in business to help entrepreneurs qualify
  • Ability to decrease cost to business by paying loan off early
  • Higher interest rates than traditional bank lending
  • If business fails, loan still must be paid back

Keys to Getting Startup Funding or Expansion Capital

cart-iconCOMBINE FUNDING METHODS

Many entrepreneurs will combine several funding methods, such as acquiring an investor to get cash on hand as a stop-gap while getting approved for a bank loan.

money-bag-iconBRING MONEY TO THE TABLE

The more money you already have to contribute, the more likely you are to get funding.

cert-iconHIGH QUALITY PLAN AND DECK

This is obvious, but you only get one shot. Don’t blow it with low-quality work. You’re there to impress investors and stand out from the crowd – and there is a large crowd.

idea-iconAN IDEA THAT SOLVES A PROBLEM

The best businesses solve a societal problem.

people-iconHAVE THE RIGHT TEAM

Investors want to know that you have the right team in place to run your business, both in management and professional services.

bank-iconKNOW WHO TO APPROACH

Individual banks and investors have specific types of businesses on which they like to focus. They are comfortable within certain industries or areas of expertise. Knowing the appropriate investor to approach is half the battle.