As businesses look to come out of a testy 2020, the need to identify capital resources have never been greater.
While there is not a ‘one size that fits all’ when it comes to funding, it is important to know the available options that might match with your business needs.
So, what are your funding options? The answer can be found somewhere, in no specific order, between the primary categories of equity (stock) sales, debt issuances, and customer contracts.
The most common go-to source for startups is the sale of equity (ownership). While more attractive for ‘Silicon Valley’ type ventures, this form of fundraising is not generally desirable for businesses that are family owned or those that do not want new owners. Equity sales generally require a committed plan, significant legal documents, and other important compliance and regulatory considerations. The laws for stock sales frequently change as well as the requirements for businesses taking on investors.
A second option, debt (loan) issuances, while common for many, can come in many forms, including private loans, SBA-backed loans, as well as loans from traditional banks. The primary benefit of using debt to fund your business is not having to go down the path of taking on new owners, while finding terms that are most beneficial to you and your business plan. The simplest and more common are private loans between the company and individuals (or private entities). Further, private loans can be creative with flexible terms and conditions, such as an option to conversion into equity, favorable repayment, as well as limited regulation as accustom with bank loans.
An additional borrowing option are Small Business Administration (SBA) backed loans, which are bank loans, but are guaranteed by the SBA, subject to an application process with SBA. Today, many might be more familiar with the SBA due to COVID-19 with the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loans (EIDL), both of which are still available. For traditional SBA loans, the applicant goes through a specific process of providing a business plan and other company information to create a funding profile. Many SBA programs are designed to help entrepreneurs, providing guidance on how to fund your business plan. The process can be beneficial for new entrepreneurs. For some businesses, finding a local banker or accountant to help guide them through any of the above processes can be beneficial.
Another option, customer contracts (orders), can be a means to fund the business through a product or service release. The benefit of growing your business without selling ownership or taking on debt can be very attractive. However, this option does require entrepreneurs to be in-touch with their market and potential customers. If businesses are still too early in development to find such customers, a grant through the Small Business Innovation Research (SBIR) can a viable option.
A final, more exotic way of bringing in funds is a SAFE Note, which is generally suited for a fresh startup venture. SAFEs are a hybrid of equity and debt, essentially a future promise of equity. This instrument was the result of some Silicon Valley ingenuity a few years ago.
As you navigate which path is the best for you and your business, keep in mind that each business is unique and ultimately more than one of these options could be the right ingredients to fuel your business in 2021. As an entrepreneur you are in control of your plan and execution, but markets and business environment are ever-changing.