What Are The Real Sources Of Business Financing

by Michael Bowers

 I saw an interesting post recently on Small Business Trends by Scott Shane about sources of small business financing.  Below you will see a chart that Mr. Shane created using U.S. Census data showing sources and percentages of use by small businesses to grow their businesses.

Source: Created from data from the Survey of Business Owners, U.S. Census via smallbiztrends.com.

If you have read Ideas To Deals much or heard me speak on business financing these findings won't surprise you but for the rest of you please take heed. Financing is a process that follows a continuum. The ability to obtain financing flows from funding vehicles available to early stage, high-risk ventures to banks that typically want to deal with established, low-risk businesses. Understanding where you are on this continuum and working the available sources will make you more successful in obtaining capital. 

Below you will see the Funding Continuum.  

 

As you look at the continuum you'll see it makes sense. At the start-up phase, when there is the most risk, where will you be most likely to get capital? The first capital in is from "You" then from the people that know and trust "YOU" the most, friends and family. Friends and family may not even know, or care, anything about the business they just know you and want to help you out. As you move up the continuum the level of due diligence increases. You will need to have a business plan with defensible projections when you speak to investors. You will more than likely need product and early customers to get the attention of venture capitalists. To go to banks you better be able to show that you have a good business now and don't really need money to sustain current levels of growth but if you get this piece of equipment or building (collateral) you can grow to the next level.

Trying to jump levels when you are not ready will, much more often than not, result in failure. So are you just stuck? Not necessarily. What you have to do is try to move yourself as far down the continuum as you can, even if you are not really there yet.

First, you also need to have a business plan. It needs solid, correct assumptions relating to the projections and have the answers to whatever questions someone might ask. This takes work but I have seen a good, well thought out, story make a difference.

Second, you need to be creative and bootstrap yourself to a level of less risk. This is what you see happening in the graph. People using personal saving, credit cards, home equity to build the level of the business before they ask other people for money based on the credibility of the business. 

Third, you need to get paying customers. While you need to think strategically and focus on where you are going and what the future state of revenue and customers will be, you have to live in the present. If you had a million dollars you could build scale quickly and have a lot of customers but if you have limited resources focus on getting the first paying customer then focus on getting the second paying customer and so on. You'll be amazed how much validation paying customers gives you. Also, revenue is the least expensive capital you are going to find.

Finally, don't give up. Being realistic and understanding what it takes to build a business and get funding will allow you to make better decisions and get where you are going faster and stronger.

Comments

[Rickcoplin.wordpress.com]

Mike,

This is an excellent overview of funding a startup. From this, entrepreneurs should recognize that one of their proprieties must be developing their personal knowledge of how money works and how it can be used to finance a business. The chart is instructive; many entrepreneurs start with the idea they need to pursue equity financing via venture capital to fund an idea. Equity comes later as an idea is proven viable in the marketplace. Our business used funds from every column in the chart as we went from idea to startup to a small growth company. At every stage, we had to educate ourselves to effectively raise and use capital in the business.

Thanks,

Rick