While it's possible to start a business on a shoestring budget with very little cash, in all likelihood your business will need upfront funding. Established businesses require financing to take advantage of an increased market, develop a new product or expand their facilities. Financing is most commonly either a loan or an investment in exchange for an ownership stake in your business. Which is best for you and your company depends on several factors. Business owners who successfully obtain financing know what's important to lenders and investors.
Income is your profit after subtracting expenses, and it is considered by both investors and lenders. If your company doesn't generate much income, lenders will conclude the business will have a tough time paying the loan back. If your company loses money, a loan won't be a financing option. A start-up business has no history of profitability, which means a bank business loan likely is out of the question. A personal loan -- perhaps from refinancing your home -- may be feasible, however. The other alternative would be investors if the business has a high growth potential in the future.
Your company's assets play a part in obtaining financing. Assets, or collateral, are a safety backup for lenders. If for some reason your company can't pay the loan back, the lenders will liquidate the company's assets for payment. Read the loan documents carefully, because you may have to pledge your personal assets as well as the business's assets. Assets aren't as important for investors, other than proprietary or intellectual property for high-tech companies. Those assets become a critical part of the valuation of the company.
If you want to manage your company with little or no input from anyone else, a loan is a better option than investors. Investors often demand input into the operations of a company. That input could be as simple as sitting on the board of directors and receiving operations reports on a monthly basis or day-to-day involvement in managing the company. Lenders most likely will have restrictions that limit additional debt but don't try to become involved in managing the company. Once the loan is paid off, the relationship with the lender ceases. Investors continue to have a say in the company until they are bought out, the company is sold or goes public. How you finance the company has an impact on your independence as management.
Consider how much financing you need because that limits your options. Small amounts of financing -- from $5,000 to $100,000 -- are more appropriate for loans, or even using your credit cards for financing. Angel investors average about $70,000 per investment per company. More than one angel can and often does invest in the company at one time. Venture capital companies invest in the millions of dollars and aren't appropriate for small amounts of funding.
Money isn't free. If your business can't afford interest payments, a loan isn't a good option. Loans usually require an application fee. The ongoing costs include interest. On a $100,000 loan, at 10 percent annual simple interest, the expense is $10,000. The loan has to be paid back. Investors have several ways of investing, which include an ownership stake in the company. Part of the investment may be a deferred-interest loan or guaranteed credit lines. If there is no loan or credit, there is no interest expense. However, you don't own 100 percent of the company. You may have to give up a significant stake -- even a majority -- of the business in exchange for the financing.