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Financing a New Business

Once a business plan is solidified to address the needs of the market, the unavoidable question of funding surfaces. Some entrepreneurs are able to leverage substantial personal savings to start a business without third-party funding; or their business offers a service and they can get up and running with minimal up-front cost.*

But what about entrepreneurs who might need financing from an outside funding source? What are the options, if any? How does an entrepreneur obtain those funds? What else should an entrepreneur be aware of to effectively avail themselves of this part of starting a business? This article will cover five key points addressing those questions.

Become Familiar with Available Financing Options

When considering financing a business, entrepreneurs should familiarize themselves with the distinct options available. Good choices for small businesses include traditional bank loans, crowdfunding, angel investment, venture capital, and grants. Highlights of each are included here.

Bank Loans

A traditional bank loan is the simplest type of funding, though getting approved for one requires some preparation. A business banker can offer helpful suggestions on which of their loans best suits your business’s needs.

Crowdfunding

Crowdfunding has become a trendy way to raise funds, with its use of smaller amounts of capital garnered from a large number of investor participants. Social media apps, such as GoFundMe, bring entrepreneurs and investors together, increasing the visibility of new business owners and their ideas to investors who would be interested in helping a new business get off to a solid start. There are some legal restrictions to crowdfunding, but these should not rule it out as a potentially viable funding source.

Angel Investment

Angel investment allows entrepreneurs to secure funding from wealthy private investors who use their own capital to fund a growing business in exchange for ownership shares. Typically, an angel investor is willing to provide money over time, especially if the business is beyond the initial startup phase but could still benefit from financial backing. The expectation, though, is that they will receive their profits eventually, through acquisition or the company going public.

Venture Capital

Venture capital (VC) provides financing to entrepreneurs whose companies have robust growth potential. This type of financing is a desirable choice for entrepreneurs who are pursuing larger sums for the first time, but do not have access to traditional bank loans or other financing options. By funding a company, a VC also gets equity. This, in turn, means that it has a say in company strategy, approach, and determinations.

Grants

Grants are another means to secure capital. Distributed by trusts, foundations, corporations, or government programs, a grant does not have to be paid back, nor are recipients required to turn equity over to the grantor. Government grants require meeting specific qualifications, to ensure that a business’s mission aligns with the government agency from where the funding is conferred. A useful database for finding a grant that corresponds to your business is www.grants.gov. The Small Business Association (SBA) is another agency that collaborates with entrepreneurs. They liaise between the government and other lending partners.

Build and Maintain Good Credit

Entrepreneurs who maintain a good credit history and keep their financial statements in order are more attractive to lenders and investors. Both support a posture of creditworthiness that increases the likelihood of securing funding.

Establish Relationships with Potential Investors

Entrepreneurs who meet investors at networking events or who participate in mentorship opportunities have the advantage of learning from these new connections what investors look for in a new business or startup. Your local Chamber of Commerce is an excellent forum for meeting other local business owners. Many of these organizations host multiple events throughout the month. The local library’s monthly calendar is also a great resource for finding events for local business owners where it is possible to meet professionals interested in mentoring. Using LinkedIn as a tool to find mentorship opportunities, as well as making connections with investors, can be greatly beneficial, too.

Understand the Benefits and Drawbacks of Each Funding Option

Each of the foregoing funding options has costs and benefits. To make an informed decision about the best choice for your business, entrepreneurs should carefully consider which option will best suit the needs of their business now, as well as future growth plans.

Questions? Ask a Funding Expert

Speaking to a bank mentor or other financial advisor may help provide detailed information about each type of funding or financing. Seeking guidance from experienced professionals who can help entrepreneurs understand the complexities of small business funding minimizes feeling inundated, and instead, can steer the way for increased success with sound business decision making.

Starting a business has many components to it and funding is a prominent one. By understanding the different funding options available, developing a strong business plan, maintaining a good credit history, building relationships with potential investors, weighing the costs and benefits of each funding option, and seeking guidance from a financial advisor or mentor, entrepreneurs may increase their probability of achieving success. For more information about funding for your business, please reach out to a Cambridge Savings Bank business banker today.

*Cambridge Savings Bank and their representatives do not provide tax or legal advice. Each individual's tax and financial situation is unique. Consult your own legal and/or tax advisors before making any financial decisions. Any informational materials provided are for your discussion or review purposes only. The content on Cambridge Savings Bank's Business Hub (including, without limitations, third party and any Cambridge Savings Bank content) is provided “as is” and carries no express or implied warranties, or promise or guaranty of success. Cambridge Savings Bank does not warrant or guarantee the accuracy, reliability, completeness, usefulness, non-infringement of intellectual property rights, or quality of any content, regardless of who originates that content, and disclaims the same to the extent allowable by law. Cambridge Savings Bank does not deliver and is not responsible for the products, services or performance of any third party. Certain links may direct you away from Cambridge Savings Bank to unaffiliated sites. Cambridge Savings Bank has not been involved in the preparation of the content supplied at unaffiliated sites and does not guarantee or assume any responsibility for their content. When you visit these sites, you are agreeing to all of their terms of use, including their privacy and security policies. Credit lines and loans are subject to credit approval. Some restrictions may apply. Banking products are provided by Cambridge Savings Bank.