If you’re an entrepreneur, there’s a good chance you have no problem coming up with new business ideas, right? However, coming up with money to make those ideas a reality isn’t always so easy!
So what’s the best way to fund your new venture? Well there are pros and cons behind each route. Let’s talk about three of the most popular options.
1. Angel/Venture Capital
Sorry if this bursts your bubble, but right off the bat it’s important to understand that getting venture capital is highly unlikely for your business. It’s generally only appropriate for established startups that have already made significant progress and have the potential to become a company with at least a $100 million valuation, if given additional funding. VC firms are not interested in mom and pop sized businesses.
Even if your business fits those criteria, good luck getting the money! The competition is as cutthroat as American Idol: hundreds of thousands try out for it, but only a few make the cut to be on the show. Even if you get that far, VC firms are notorious for only giving companies enough money to last for 6-12 months. Then it’s another round of financing, where the founders’ equity gets diluted away even further. Weigh the pros and cons before you attempt to go down this path.
Meanwhile, angel funding can sort of be thought of as “mini” venture capital; it comes in much smaller amounts, it’s easier to get, and sometimes you don’t even need an established company to get it. As someone who has personally been an angel investor (in a company which eventually went public) my advice is to bring your “A” game, because when wooing angel investors, they’re probably basing their decision on you (management) more than anything else.
2. Traditional loans and credit cards
If you’re only looking for a few thousand dollars, then this might be the route you want to go. Assuming you have good credit, you can probably borrow up to $10-20k on an unsecured basis. For higher amounts, you will likely need to have some sort of collateral.
The biggest drawback with going this route is that due to the state of the economy, lending requirements have tightened dramatically. It’s no longer easy to get approved for a credit card and even if you do, the credit limit might be less than you need. For example, when I opened my Ink Cash Visa from Chase (for my business) the credit limit was significantly less than the first business credit card I opened before the recession.
The other drawback with going this route is that you will be required to make a personal guarantee. The means if your business idea doesn’t work out, you will have to personally pay back the debt. Contrast that to angel and venture capital, where you will not be obligated to pay back the money if your business fails.
3. Borrowing from family and friends
Getting a loan from family is a very common way for entrepreneurs to fund their business. But even if you know someone who is willing to lend you the money, you might not want to take it. Why? Because money has a tendency to bring out the worst in people… it causes arguments and disputes.
Sure, getting into a dispute with a bank or credit card company is bad, but it’s sure a lot worse to fight with someone you love. Because new businesses have such a high failure rate (we all know it comes with the territory) the truth is that by borrowing money from a friend or family member, you may be jeopardizing that relationship.
Conclusion? You need to think twice before considering. If you think of doing it, make sure both parties are fully aware of the risks. Also, make sure you document the loan properly.
Mike Dolen has been an entrepreneur as long as he can remember. From running an eBay business as a teenager, to his latest venture of providing reviews to consumers at CreditCardForum.