Most healthy businesses need business financing at some point. Startups have to deal with starting costs and ongoing businesses have to finance growth and working capital.
Deciding to take on some kind of debt is quite common, but financing options depend on what kind of business you have. Its age, position, performance, market opportunities, team, and so forth are very important. So you should tailor your funding search and your approach. Let’s walk through how to conduct a funding search and define some common options.
How to find funding for your business
#1. Venture capital
The business of venture capital is frequently misunderstood. Many startup companies complain about venture capital companies failing to invest in new or risky ventures.
People talk about venture capitalists as sharks, because of their supposedly predatory business practices, or sheep, because they supposedly think like a flock, all wanting the same kinds of deals.
This is not the case. The people we call venture capitalists are business people who are charged with investing other people’s money. They have a professional responsibility to reduce risk as much as possible. They should not take more risk than is absolutely necessary to produce the risk/return ratios that the sources of their capital ask of them.
#2. Angel investment
Angel investment is much more common than venture capital and usually is far more available to startups, and at earlier growth stages too.
Although angel investment is a lot like venture capital (and is often confused with it), there are important distinctions. First, angel investors are groups or individuals who invest their own money. Second, angel investors tend to invest in companies at earlier stages of growth, while venture capital typically waits until after a few years of growth, after startups have more history.
Businesses that land venture capital typically do so as they grow and mature after having started with angel investment first. Like venture capitalists, angel investors normally focus on high-growth companies at early stages of development. Don’t think of them for funding for established, stable, low-growth businesses.
#3. Commercial lenders
Banks are even less likely than venture capitalists to invest in, or loan money to, startup businesses. They are, however, the most likely source of financing for established small businesses.
Startup entrepreneurs and small business owners are too quick to criticize banks and financial institutions for failing to finance new businesses. Banks are not supposed to invest in businesses and are strictly limited in this respect by federal banking laws.