Where Do You Go?

Roughly speaking, investments break down into two forms: debt and equity. You take on debt when you borrow money from a lender, and pay interest on that investment. You are compelled to repay the money with interest over time. Or, you can take on an equity investment - in which you sell a portion of the company to an investor in return for cash or something else of value.

Each source carries advantages and disadvantages. Consider them well before making choices, for finance decisions are hard to undo. It's not enough to find lenders and investors; you have to pick the right ones. Try to find investors who bring more than cash to the table. Look for supporters who can help you with financial advice, technical assistance, or who can connect you with key customers. Seek patient capital from a sage who can listen to your problems over breakfast and set you straight by the time you reach the office.

And: make sure that you find investors whose interests align with yours. Naturally anyone who lends you money is banking on the success of the company, but be sure that you have clear mutual goals and what (and when) that that definition entails. If you are going to friends or family, for example, make sure that they are not investing money that must be repaid in a few months. And be clear with others what your long-term goals are. You don't want to surprise investors if you eschew rapid growth, or make other decisions that are consistent with your vision, yet don't reconcile with theirs.

"Capital raising should be an extending circle," says Scott Shaw, founder of the Austin Grill, a successful Tex-Mex restaurant in Washington, DC. He explains that you start small with an immediate group of investors who can help you directly. Then you gradually build on that platform, seeking larger amounts from people you come to meet and with whom you will probably have a more formal relationship. Shaw also counsels that you "listen to the capital markets." They may be trying to tell you something about your venture. If you're having trouble raising money, there may be a very good reason why. If you are going out to seek capital - and the associated advice - from people who may have more experience, it's a good idea to listen to them! They may know something you don't.

Simple Loans

So, what are your capital choices? Let's start with simple loans. Your first source of capital will probably be a loan from yourself. Most businesses are founded with cash from the founder's pocketbook. Sure, there are simple advantages here: pure control and ownership. You own the whole company, control the show, and stand to reap the gains should your venture become valuable. Great.

But there's a huge potential downside here as well. Even the best-researched and well-run startups involve risk. And you are putting your assets on the line. It's great to read about risk-takers who take out second mortgages on their homes and borrow from their retirement funds to launch businesses that turn them into millionaires. There are far fewer stories in the news about the many people who take great risks - and fail. And unfortunately, these stories are very real and very common. So while I believe you need to trust yourself, and take the leap, be sure to consider (and reconsider!) the risk of your venture carefully when investing your own money.

There are wild stories of individuals who turn to credit cards for their startup capital. Sure, in our credit-easy economy, credit cards represent an easy form of quick cash, one that many starting entrepreneurs exploit - especially when they come with low rates. Yet the eventual high rates and lack of any other support rate them low on the list of sources.

Friends and Family

The next most popular source of loans for startups comes from friends and family. On the plus side, loans from such intimate ties can be a blessing, a sign of love and confidence. They may have generous terms, and they might be easily obtainable. But keep in mind: they come with strings attached. Wait - let me put it another way: they come with ropes attached, huge hairy ropes that are potentially agonizing because they are so hidden from plain view. Many entrepreneurs who tap their parents or friends for capital find that they have created a vehicle called a business that enables them to recreate old conflicts or relationships. You will have to feed their emotional investment as well as their financial one. Such costs can greatly devalue the value of your loan. And, try to borrow from those with whom you know your relationship will withstand the failure of your business.

The key thing here is to realize that when they give you money, they're not just friends and family; they're investors. Loans from a friend or family member should be handled less formally, right? No need to be too nit-picky about terms of repayment or other such legal stuff, right? Wrong. In fact, you can't be too careful about writing down the terms that come with a loan from someone with whom you have deep emotional ties. You need to be clear up front how much risk is going into this investment, and to create a formal document that prepares for the contingencies that may arise. Such a document can save a lot of grief if you have trouble repaying the loan. Of course, hard feelings may arise regardless of preparations, should you fail to repay the loan. There's not much to say except ... don't let this happen.

Outside Investors and Banks

The next circle of support is outside investors; individuals who believe you have the ability to deliver on your promises and are seeking a decent return on their money. Bear in mind that you should think expansively about potential investors. Cast a wide net. Ask everyone who knows and does business with your business whether they want the opportunity to invest in your business. Build on the circle of contacts that you have, or are forming with your business. Remember that you are building networks, and so if one person cannot help you with money, thank them for their help, and ask if they know others who could.

From here you launch into more formal territory, starting with banks. Now, many small business owners feel that banks lend them money only after they become financially solvent, or in other words, when they least need the capital. There's an element of truth here. Because one of the key pieces of information banks look for when considering a loan is a demonstration of cash flow, they are not the best necessarily the best source for starting funds. Nonetheless, you are well served to cultivate a good relationship with a banker, prepare yourself for a time when they can lend you money, and see whether they can provide you with advice or contacts in the meantime.

Moreover, more banks today, especially smaller, community- based banks, are willing and able to help startups. The advantages of community banks are many: they provide short to medium-term funding, and are the single largest source of loans to small businesses and entrepreneurs. They "get" you, and are often more flexible than large institutions. Because they are smaller, your business is more important to them. And good community bankers often offer good advice and valuable contacts.

Government

Don't forget that the government can help your small business. The Small Business Administration, or SBA, offers a number of loans for startups. Actually, the SBA loans don't come directly from the Small Business Administration; this governmental agency guarantees a loan that you secure from any number of traditional lending institutions. The range of programs is too varied to go into here - but check out the website (www.sba.gov) for more information. Moreover, as I discussed in chapter two, the agency that provides the loan is more than likely to offer other education and services that will nourish your company. Whichever program you explore, be sure to look into the network of support that you connect with in finding the capital.