SAN ANGELO, Texas — Many entrepreneurs and potential small business owners mistakenly believe a business plan will generate financing to start their business.
There are many types of options that require a business plan, but nobody invests in a business plan. Lenders or investors need a plan that communicates ideas and information, but they invest in a company, a product and in people.
The process of looking for funding must match the needs of the small business. Where you look and how you look for money depends on your business and the kind of money you need. There is a huge difference between a high growth Internet-based company needing additional venture capital and a local family owned startup business.
I mentioned venture capital above, and it is frequently misunderstood. 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 shouldn’t be thought of as a source of funding for any but a few exceptional startup businesses. Venture capitalists look to have a good chance of producing up to ten times an increase in business in three years. They prefer to work with proven business owners who have a successful and growing enterprise.
Venture capital is not the only source of investment for startup or existing small businesses. Many companies are financed by smaller investors. There are groups of investors who meet occasionally to hear proposals. They are known as “angel investors.”
Banks are the most likely source of financing for most small businesses. Entrepreneurs and startups sometimes have a difficult time acquiring capital from bankers. Banks are strictly limited in this respect by federal banking laws. Federal regulators want banks to keep their money safe, in conservative loans backed by solid collateral.
Startups are considered risky as they have no track record. A business that has been around for a few years generates enough stability and assets to serve as collateral.
The majority of small business financing is accomplished through bank loans based on the business owner’s personal collateral.
Potential small business owners should know how much money will be needed to fund the venture, and understand that it is at risk. Don’t bet money you can’t afford to lose. Know how much you are betting.
Friends and family sometimes get caught up in the excitement of wanting to help a loved one starting a business. If parents, siblings and good friends decide to invest in your business, they have paid you an enormous compliment. Make sure you understand how easily this money can be lost, and that you make them understand as well.
It may be difficult to rule out starting your business with investments from friends and family, don’t ignore some of the disadvantages. Start this relationship with your eyes wide open.
“Business Tips” was written by Paul Howard, Business Development Specialist and Certified Business Adviser IV of Angelo State University’s Small Business Development Center. Contact him at Paul.Howard@angelo.edu.