As accountants and advisors we are often asked by small business owners as to the best method to raise capital. The chart below seeks to provide some insight into various common methods for raising capital for small businesses.
Please note methods, business types, amounts raised and the criteria indicated below are generalizations for typical situations common in business. However, each method can theoretically be applied to any business type and amounts raised could be any amount depending on the financial situation of the entrepreneur.
|Method||Business Type||Example of Business Type||Typical Amounts Raised||Criteria|
|Personal Funds/Credit Cards||Small, closely held Business; Start-Ups||Family owned pizzeria; Retail store start-up||$50,000 or less||In general, personal funds (including personal loans and credit cards) financing is typically used for small businesses with limited cash requirements. These often include lifestyle businesses providing income for the owner of the company. Personal funds and credit cards may also be used for start-up businesses so that an entrepreneur can establish a proof of concept before taking on an investor or pursuing other means of raising capital.|
|Friends & Family||Small, closely held Business; Start-Ups||Family owned pizzeria; Retail store start-up||$100,000 or less||In general, friends and family invest in an entrepreneur’s business because they believe in the entrepreneur and they want to help their business succeed. For this reason, friends and family will lend money to or invest in the business even when there is no track record or poor track record|
|Bank Loans & Other Financing (Typically Requires Reviewed Financial Statements)||Expanding Businesses||Marble & Tile distributor opening a second warehouse to expand distribution channels||$15,000 and up||In general, bank loans and other financing (lines of credit, equipment loans, asset based lending including accounts receivable financing etc.) are used for established businesses. When a business is small, cash flow can be variable and expansion can drain cash reserves. As long as the entrepreneur is able to repay the loan, loans do not require to sacrificing ownership (equity) to an outside party. However, the loan payments can add an additional drain on cash flow. Taking on debt should be done only after careful consideration of how the borrowed funds will be invested to ensure that it will generate enough cash flow to prevent insolvency. Also beware failing to meet bank covenants can lead to the bank calling the loan often at a time when it’s difficult for the business to repay.|
|Angel Investor (Typically Requires Reviewed Financial Statements)||Start-Ups||A new IT business that has created a revolutionary operating system for PC’s.||$100,000 and up||In general, an angel investor will invest in start-ups in exchange for ownership equity or debt convertible to equity. Angel investors typically make their investment decisions based upon the potential for the business to grow rapidly and the quality of team that will be running it. Angel investors often enjoy working with entrepreneurs and enjoy providing guidance as the business grows. Angel investors are often willing to invest in ideas and people before the business would qualify for traditional financing. That said, they are investing with the expectation there will be sizable returns on their investments over time.|
|Venture Capital (Typically Requires Reviewed Financial Statements)||Start-Ups & Expanding Businesses||A new water bottle manufacturer who is opening a second warehouse to expand distribution channels||$100,000 and up||In general, Venture Capital is like Angel funding but instead of individuals investing their own money, Venture Capital is typically provided by a company investing from a pool of assets. The pool of funds may be raised from companies, institutions or wealthy individuals. Venture capitalists typically invest larger sums of money than Angel Investors and will often require one or more seats on the board of directors. Venture Capitalists usually like to invest in a business that has an idea that can scale quickly into a multi-million dollar business. They expect a strong management team.|
|Crowdfunding (Equity Based) (Typically Requires Reviewed Financial Statements)||Start-ups||A new app that allows you to better keep track of foods you eat, calories burned and progress made on a day to day basis||$10,000 and up||Equity Crowdfunding is new in the US. This is distinct from going public. Crowdfunding allows a small business to raise roughly up to $1,000,000 from many small investors. Websites such as “Kickstarter” and “GoFundMe” which have developed in recent years to fund specific projects are now entering into the new territory of Equity Based Crowdfunding.|
|Foundations (May Require Reviewed Financial Statements)||Start-Ups & Expanding Businesses||A pharmaceutical company is performing research that could find the cure to Alzheimer’s Disease||$10,000 and up||In general, foundations invest in non-profit enterprises and businesses that address a specific social cause or purpose. Foundations often provide grants to address a specific need such as launching a service to a community in need. For example a foundation may support addressing the nutritional needs in poor communities.|
|Grants (May Requires Reviewed Financial Statements or Audited Financial Statements)||Start-Ups & Expanding Businesses||A not-for-profit company that provides housing, social and other medical services to developmentally disabled individuals||$10,000 and up||In general, grants can be awarded by foundations, charitable organizations, municipalities, states, the federal government and other organizations. These amounts are usually not repayable to the Grantor as long as the funds are used as the grantor intended. There are often stipulations that come along with receiving grants such as audits and other compliance requirements that the grantee must abide by. It should be noted that grants may be awarded to both not-for-profit organizations and also to companies whose goal/purpose supports the goal/purpose of the Grantor.|