Financing Fit

Back to the Start

Chasing Rainbows

Avoid chasing the rainbows of inappropriate or unattainable sources of financing.

At the beginning of this course, I asked you to keep several questions in mind as you consider financing fit:

  • How much money do you need?
  • For how long do you need it?
  • What is the use of funds?
  • What is the growth potential of your business?
  • How much business uncertainty do you face?
  • How much flexibility do you need (and for how much are you willing to pay)?
  • What collateral are you willing and able to pledge to secure a loan?

Your answers point you toward the right financing for your business and help you avoid the time-suck of chasing the rainbows of inappropriate or unattainable financing sources.

Venture Capital Does Not Apply

Notwithstanding what you might have surmised from the business press, the vast majority of new businesses are launched with less than $100,000. In almost all cases, financing is sourced from personal savings and credit as well as friends and family. Equity investments from angels and venture capital firms are relevant to just 1 in 100 early stage businesses.

Startup Financing by Source

Personal resources and friends and family finance 95% of startups.

A young company that desires flexibility is likely to find equity financing attractive. However, it simply isn’t available to most companies. Debt may not be ideal, but it’s what’s on the table.¬†Furthermore, bank debt usually comes into play as businesses mature, demonstrate capacity, and require financing of several hundred thousand dollars or more.

Financing Strategy is Dynamic

Most companies will negotiate a path leading from friends and family through non-bank, alternative lenders to, perhaps, banks.

Financing Fit Chart

Time resolves uncertain and brings growth. If you were to trace your path on the chart above, you would draw a line moving from the upper-left quadrant to the lower-right quadrant. Although some collateral-rich companies might be able to access low-cost bank debt early by qualifying for a partial SBA loan guarantee, an increasing number of firms will tap into alternative lenders to fill the gap between friends and family and banks. In the next and final lesson, we’ll take a closer look at alternative lenders, in particular.

Lesson tags: financing