16 ways to fund your new business

Editor's Notes

• #5: For decades, entrepreneurs have followed traditional stair-step methods of financing to move their companies through successive stages of growth.
• #7: Rather than contributing cash, they might write code for a new iPhone app or build a workshop in their garage. Unequal financial contributions or sweat equity among the partners may change their views on the ownership shares they deserve. Draw up a written “deal memo’’ on the ownership percentage for each partner. A truly original idea conceived in an instant can be worth hours of computer programming.
• #9: The initial funding for a fledgling private business has often come from its founders. A budding entrepreneur might draw on a personal savings account to finance an indie film, or plunk down a credit card to pay for the machine tools needed to build a sample product or prototype. 
 Cautions: If you’re not already keeping careful books, start now. Unequal financial contributions or sweat equity among the partners may change their views on the ownership shares they deserve. Clear agreements can avoid multimillion-dollar lawsuits years later if the enterprise takes off. The huge drawback of credit cards is that they carry very high interest rates. At the time of this writing, the average interest rate for a balance transfer credit card is 13.2 percent [source: Bankrate.com]. So if you choose to use a credit card for start-up capital, make sure you have a plan to pay it back quickly. If not, that interest will add up fast.
• #10: When a young enterprise produces promising early results, the founders’ friends and family often chip in money to help it grow. The entrepreneurs’ parents may give them a loan, or their college friends may buy small ownership stakes. Borrowing money from friends and family to finance a new business is a terrific idea -- in theory. Banks and other lenders will demand airtight business plans and often three years of earnings, before they will lend you anything. That said, private loans can offer significant advantages over traditional loans. Interest rates -- if interest is even charged -- are generally much lower than those offered by banks. Private loans are also an important show of support (both financial and emotional) in the early stages of a new business [source: Advani].
• #12: Innovative businesses can now use social media sites such as Kickstarter and Indiegogo to appeal for financial support through “ crowdfunding ’‘ campaigns. Entrepreneurs attract backers by posting their imaginative plans, and often, by promising perks to those who pitch in some money. Those perks range from product samples to an invitation to join a company-sponsored activity. 
 Advantages: You might raise significant sums made up mainly of small amounts from a large group of individual lenders. Offering perks like product samples or invitation to join a company kick-off party can raise more funds. Your project may even attract press coverage and new ideas. 
 Caution: Your funding contributions might be taxable as either personal income or business profits. Look for guidance from the Internal Revenue Service.
• #13: This new form of crowdfunding authorized by Congress recently through the JOBS Act will allow private sales of company shares through social media sites and other intermediaries. Companies could raise as much as $1 million a year through small private investments from an unlimited number of people. Crowdfunding websites are expected to crop up after the Securities and Exchange Commission formulates the regulations they must follow. 

 They hope to do it: These fundraising platforms are expected to emerge after the SEC draws up regulations for them to follow. Indiegogo has expressed interest in supporting Equity Crowdfunding. 
 Advantages: The regulatory requirements, such as financial disclosures, would be less stringent than general SEC rules for registering securities or for making an initial public offering of shares. 

 Cautions: Your many new shareholders have rights under federal and state laws. Complying with those rights could soak up company time and money. A start up’s crowdfunding investors may also look like a cumbersome burden to some venture capital firms you’d counted on for your next round of financing.
• #14: The Internet has added an interesting new wrinkle to the world of new business financing. On so-called social lending Web sites, individuals can apply for loans from other individuals. The two parties set their terms and the Web site acts as the intermediary. One of the more popular social lending sites is called Prosper.com. The site is designed around the auction model popularized by eBay. As a borrower, you register at the Web site and post a loan request for a fixed amount of money at a maximum interest rate. Interested lenders then bid on your loan. When you find a lender that offers an attractive interest rate, you proceed with the loan. All loans on social lending sites are three-year unsecured loans. Unsecured simply means that the loan is made without any collateral. A credit card is another form of unsecured loan. LendingClub.com is another social lending Web site, except it uses a system based on your credit rating. When you register at LendingClub.com, the site assigns you a credit rating (A, B, C, et cetera). Different credit ratings qualify for different interest rates [source: Lindner]. Once the loan is approved, the amount is deposited directly into your bank account. Likewise, fixed monthly payments are automatically deducted from your bank account for the life of the loan.
• #15: Angel investors are successful businesspeople who dig into their deep pockets to finance new businesses with high growth potential. If you're low on start-up capital, an angel investor can truly seem "heaven sent," but it's important to read the fine print. First of all, money from an angel investor is not a loan. It's an equity investment . An equity investment buys the investor a share in the ownership of the company [source: FindLaw]. So if you accept money from an angel investor, you're also giving up partial control of your new business. An angel investor will ask for at least a 10 percent stake in your business, but could go as high as 50 percent for a riskier start-up [source: Entrepreneur]. For many small business owners, it's difficult to cede authority to an outside investor, so think hard before attaching strings to your money. On the bright side, since angel investors don't give loans, there are no regular payments with interest to worry about. As partial owners, however, they'll take a chunk of your profits. How do you find an angel investor? Ask people who do business with the extremely wealthy, like bankers, accountants and lawyers and look for a local venture capital club. Often times, a local college business school will have contacts. Wealthy individuals called angel investors like to make financial bets on early stage private companies that are capable of rapid growth, but that are still too small to seek millions from venture capital firms. Angels, who may belong to groups such as the Vermont Investors Forum, often take an ownership stake in exchange for their private investment of personal funds. Such sales of company shares are called “private placements.” 

 They did it: In 1998, Sun Microsystems co-founder Andy Bechtolsheim gave Larry Page and Sergey Brin a check for $100,000 to support their work to found Google Inc. 
 
Advantages: Angel investors are often experienced entrepreneurs, who can become valuable advisers to a young company. 

 Cautions: Any financing round that involves selling shares to new investors can reduce the entrepreneur’s freedom to make business decisions unilaterally. The new ownership structure may also limit valuations and options for the next round of financing. Privately held shares have traditionally been hard to sell to others, but new online businesses, such as Xpert Financial and Second Market, have arisen to serve as trading platforms.
• #16: In 1992, the United States Small Business Administration (SBA) launched a micro loan program to help small business secure the financing they couldn't get from traditional lenders like banks. Under the micro loan program, the SBA doesn't actually lend money directly to small businesses. Instead, it works with 170 non-profit lenders around the country called intermediaries . The intermediaries receive money from the SBA, which they use to make small loans at relatively low interest rates. A new business can secure a micro loan for as little as $100 and as high as $35,000. The SBA says the average loan size is $13,000. Interest rates vary between 8 percent and 13 percent depending on the size and duration of the loan. The maximum length of an SBA micro loan is six years [source: U.S. Small Business Administration]. To apply for a micro loan, you'll need to be within the local lending area of one of the 170 non-profit intermediaries. Most microlenders also require borrowers to complete business training and business planning seminars before receiving the loan. Some microlenders specialize in lending to businesses owned by women, minorities, the disabled or other economically marginalized groups [source: Consumer Reports].
• #17: Bank loans are one of the most traditional and conservative ways to finance a small business. Unfortunately, they're also some of the hardest loans to get. Small business loans are small beans for banks because they make a lot more money from big loans [source: Consumer Reports]. But with the right attitude and the right business plan, you might get lucky. A typical commercial loan from a bank feels a lot like a mortgage. There's a fixed interest rate, fixed monthly or quarterly payments and a maturity date. The specific terms of the loan vary depending on whether it's an intermediate-term loan (less than three years) or a long-term loan (up to 20 years) [source: Entrepreneur]. One reason why bank loans aren't ideal for new businesses is that the bank will often require collateral or other existing business assets that it could seize in the event of a default. New businesses typically don't have a lot of collateral. That's why bank loans are better suited for construction projects, buying new equipment or expanding an existing small business. Still, don't give up on banks. If you already have a strong working relationship with a local bank, you might be able to convince them to give you a small commercial loan. Remember to bring a solid business plan with realistic financial projections. Of course, it wouldn't hurt if the loan officer were a close family friend, too.
• #18: Bank loans are one of the most traditional and conservative ways to finance a small business. Unfortunately, they're also some of the hardest loans to get. Small business loans are small beans for banks because they make a lot more money from big loans [source: Consumer Reports]. But with the right attitude and the right business plan, you might get lucky. A typical commercial loan from a bank feels a lot like a mortgage. There's a fixed interest rate, fixed monthly or quarterly payments and a maturity date. The specific terms of the loan vary depending on whether it's an intermediate-term loan (less than three years) or a long-term loan (up to 20 years) [source: Entrepreneur]. One reason why bank loans aren't ideal for new businesses is that the bank will often require collateral or other existing business assets that it could seize in the event of a default. New businesses typically don't have a lot of collateral. That's why bank loans are better suited for construction projects, buying new equipment or expanding an existing small business. Still, don't give up on banks. If you already have a strong working relationship with a local bank, you might be able to convince them to give you a small commercial loan. Remember to bring a solid business plan with realistic financial projections. Of course, it wouldn't hurt if the loan officer were a close family friend, too.
• #22: Trade credit is the lifeblood of most established businesses. It works very simply. When you buy parts from a supplier, the supplier delivers those parts with an invoice for the amount due. Because you have an established relationship with the supplier, he doesn't ask you for cash on delivery (COD). Instead, you have a period of time to pay him back without incurring any interest or penalties. That's called trade credit. Trade credit is based on trust. As a new business, you're at a disadvantage, because you don't have an established track record of paying invoices on time. If you want to win the confidence of suppliers, you'll need to present them with the same credentials you might give a bank: a business plan, collateral, financial statements and other proof that you have your act together [source: Entrepreneur]. One of the greatest advantages of trade credit is that it's interest-free for a fixed period of time, perhaps 30 or 60 days. Even better, some businesses offer discounts if you pay the invoice within a very short period of time, maybe a week or 10 days. As a new business, it might take a lot of legwork and a little luck to secure trade credit, but it's worth it.
• #23: The new JOBS Act also allows companies to delay SEC registration as a publicly traded company while raising funds from private investors. Formerly, companies could not sell shares to more than 500 investors without registering and complying with SEC rules governing public companies. That shareholder threshold has now been raised to 2,000. However, the JOBS Act will reduce the regulatory requirements for up to five years for “emerging growth companies’’ that conduct IPOs. These companies can delay compliance with certain SEC rules, including some auditing requirements. But they must comply fully once they reach annual gross revenues of $1 billion, or meet other milestones . 
 Mark Pincus founded social media game maker Zynga in 2007, and its games, including FarmVille and CityVille, took off. In December 2011, Zynga announced an initial public offering of 100 million common shares at $10 apiece. 
Facebook’s IPO was the most actively traded first day IPO ever, making the founder, a Billionaire several times over.