What to consider when looking for startup financing

You may think that with a great idea, and a good business plan, you will have no problem getting your business up and running. However, the reality is that for most people, finding the startup financing they need can be difficult and overwhelming. You must prove your concept first, before anyone will put up serious amounts of money. The bottom line is that most businesses require some sort of initial capital for things like inventory, marketing, physical facilities, incorporation expenses, etc. This means that it becomes crucial to find startup financing. However, with some research, planning and hard work, it can be done. Here is what you need to consider when looking for startup financing-

You need to ask yourself the following questions and then make sure that you have a clear answer to them, for your potential lender.Keep in mind that the answers to these questions will help you prioritize the many funding options available.

• Are your needs short-term or long-term?
• How quickly will you be able to pay back the loan or provide return on their investment?
• Is the money you are seeking, for operating expenses or for capital expenditures that will become assets, such as equipment or real estate?
• Do you need all the money now, or in smaller pieces over several months?
• Are you willing to assume all the risk if your company doesn’t succeed, or do you want someone to share the risk?

There are fundamentally, two types of business financing. These are:

• Debt financing-When you use this type of financing you borrow the money, and agree to pay it back in a particular time frame, at a set interest rate. It is important to remember that you owe the money, whether your venture succeeds or not. Bank loans are what most people typically think of as debt financing, but there are other options as well.
• Equity financing-When you use this type of financing you sell partial ownership of your business, in exchange for cash. The investors assume all (or at least most) of the risk. This means that if the business fails, they lose their money. However, if it succeeds, they typically make much greater return on their investment than interest rates. You should keep in mind that equity financing is far more expensive if your company is successful, but far less expensive if it isn’t. In addition you must understand that because investors take on a much higher risk than lenders, they are typically far more involved in your company. This can be a mixed blessing. Investors can offer advice and connections to help grow your business. You should still be careful not to give up too much control of your company.

Now that you know what you need, and what financing is, it is time to look at the many options that are available for startups.

Friends and family-This can be your best source for both loans and equity deals. The most important thing to keep in mind is that you should structure the deal with the same legal rigor you would with anyone else, or it may create problems down the road, when you look for additional financing. When meeting with them you should prepare a business plan and formal documents.

Credit cards-These are a great tool for cash flow management, assuming you use them just for that, and not for long-term financing. You should keep one or two cards with no balance on it, and pay it off every month to give yourself a 30 to 60 day float with no interest. Keep in mind when they are managed well, they’re extremely effective; managed poorly, they’re extremely expensive.

Leasing-This is the way to go if you need big-ticket items such as equipment, vehicles, or even computers.

Angel investors-They can fill the gap between friends and family, and venture capitalists, who now rarely even look at investments below $1 million. You should enlist a savvy financial adviser to structure the deal.